What Does Paid in Arrears Mean?
Small business owners have a lot of expenses to manage. Taking care of rent, utilities, payroll, and stocking the shelves means it’s important to know when you’ll get paid by your clients. Receiving and making payments upfront is usually ideal, but often you’ll receive or make payments in “arrears.”
So what does paid in arrears mean? Simply put, paid in arrears means the payment is behind. This might be due to the payee missing the payment deadline, or that the payment was scheduled after the service period. It could also be due to a payment being missed by mistake.
An example of getting paid in arrears by mistake could come from an automatic payment not going through for a particular month. The payments go through fine in March and April, but then it doesn’t go through for May. The payment for June would then be in arrears for May, and every month thereafter.
Why Do Companies Pay in Arrears?
Companies often pay their service providers and employee payrolls in arrears. Making payments in arrears is very common for most small businesses.
Paying at the end of a pay period gives a business the time to secure financing, whether that be through receiving money from those that owe them or just making more sales. It allows for immediate needs to be met with the promise to meet financial obligations later.
Payroll in arrears means paying employees for the previous week’s work. The alternative to this is called current pay, where employers pay at the end of the pay period.
Benefits of Arrears Payroll
Paying employees in arrears is a lot simpler and more efficient than the “current pay” method. For starters, if you sent out payroll on the last Friday of the pay period, it would mean the employee would have to clock their Friday time before they actually worked those hours.
Additionally, if an employee were to take emergency time off at the end of a pay period, they would be overpaid in the “current pay” system.
Payroll in arrears allows time for accurate time reporting and calculating things like federal and state tax withholdings, payroll taxes, and benefit deductions.
Once employees get into the rhythm of the offset payment period, they likely won’t notice the week-long delay. However, if an employee’s hours vary from week to week, it’s important to inform them their paychecks are in arrear format.
What Does Arrears Mean for Your Accounting?
Balancing your budget and finances is important no matter the method of your payments. While paying in arrears gives your company time to balance financial obligations, it can sometimes mean you’re behind on payments. Be wary of paying for too many things in arrears; it’s the same idea as not charging too much to a credit card.
Keep tabs on every company you are paying in arrears and every company that is paying you. Noting when you’ll receive payments will directly affect whether or not you can make your deadlines. If a company paying you is too far back in arrears, you may need to consider suspending business with them until they meet their obligations.
What is an Example of Being Paid Monthly in Arrears?
Some companies choose to pay employees only once a month, but that doesn’t mean you need to wait for them to work a full month before paying them. To give an example of getting paid monthly in arrears, consider the following:
Two employees start work at a company in the month of May. Jimmy started work on May 1 and Chris on May 22. Even though three weeks passed between their start dates, their pay period ends at the same time on May 30th. The employees will be paid for the work during that month during the first week of June, rather than making Chris wait until June 22 for his first paycheck.
If your employees are paid in arrears for two weeks of work, which is the norm, you would pay them one week after the pay period.
Don't want to worry about payroll schedules?
What is the Opposite of Billing in Arrears?
The opposite of billing in arrears would be “paid in advance,” which is charging before the services are completed. The benefits of this method include getting more money upfront and usually not having to collect as many payments
While getting money in advance is nice for small businesses, it may be hard to get customers to trust your services. If they’re a new customer, they may be unsure of the quality of your product or service and hesitate to pay in full before you deliver.
Is Salary Paid in Advance or Arrears?
Salary is rarely paid in advance. It’s common practice to pay workers after they’ve completed their work, not upfront. This way employees don’t get paid for days they take off after already being paid for them.
Can You Pay Overtime in Arrears?
Yes, you can pay overtime in arrears. In fact, paying overtime in arrears is much easier than current pay.
For example, say you have two workers scheduled to work eight hours each, Chris on Wednesday and Mary on Thursday. Chris had to cancel for a medical emergency, and the only person who could cover his shift is Mary. Mary now exceeds 40 hours for the week after picking up the shift and qualifies for overtime.
If payday is Friday and you use the current pay system, you couldn’t properly calculate the schedule change or the overtime pay.
Paying in arrears gives you time to know workers’ schedules before you pay them, allowing you to calculate both their total hours worked and any overtime bonuses for which they may qualify.
Did you know?
There are some definite benefits to paying in arrears, whether you’re paying your employees or for other products and services. Still, be careful that you don’t get yourself in trouble by getting behind on payments or collections.
We hope this clears up any questions you may have had about paying in arrears. If you’d like us to manage your payroll, visit EddyHR’s payroll page to see how we can help your business.