What does paid in arrears mean?

Paid in arrears means a company pays for goods or services after they have been provided. It’s a common payroll practice to pay employees for the time worked. Businesses often pay employees for labor provided in a previous pay period.

What does paid in advance mean?

When you pay someone in advance, the worker receives all or some of their payment before completing any work. While rare for standard payroll, employers may pay in advance for contractors or specialized design work.

For example, manufacturers may require payments before they begin production cycles, and lawyers and other professionals may work on retainer, which is a type of advance payment.

Handling payroll in arrears

When you pay in arrears, you typically make payments to employees on specific dates. Employers set a yearly pay period and schedule payments. For example, you may pay employees three to five days after the end of each biweekly pay period. If your workweek runs Monday through Sunday, you could pay employees the following Friday (five days after the period ends).

Paying in arrears with this kind of schedule allows you to have several days to calculate payroll. That time helps you comply with tax withholdings and other payroll responsibilities.

For example, payroll teams may need to adjust an employee’s earnings if they’ve missed work, traded shifts with coworkers or used unplanned paid time off (PTO). Paying in arrears gives your team time to review pay changes related to these events and helps ensure correct paycheck amounts.

While paying in arrears is common for traditional employees, it can also apply to other circumstances. Many independent contractors and vendors send invoices after completing work or performing a service, a process called billing in arrears.

To better understand how payment in arrears works in various scenarios, consider the following examples:

Example 1

David Altuve works his usual eight–hour shift on Monday, Tuesday, Wednesday and Thursday, but he takes Friday off. After the workweek ends on Sunday night, David’s employer calculates his wages, including PTO. The company pays David the following Friday, five days after his previous workweek.

Here’s a sample calendar for context:

• Monday, November 3: Worked 8 hours
• Tuesday, November 4: Worked 8 hours
• Wednesday, November 5: Worked 8 hours
• Thursday, November 6: Worked 8 hours
• Friday, November 7: Took off 8 hours of PTO coverage

The pay period ends on Sunday, November 9. On Friday, November 14, David receives pay for 40 hours of work. This example assumes a weekly pay schedule. The employer might begin processing payroll on Monday, November 10, to make sure David receives payment on Friday.

Example 2

This example follows a biweekly pay period, with employees paid every other Thursday. Naveen Head is a full-time employee who’s paid hourly. He works eight hours per day, Monday through Friday.

Since employees are paid on Thursdays, the pay period extends through the previous Friday. Here’s an example of the schedule:

• Pay period: Saturday, September 6 through Friday, September 19
• Hours worked: Monday through Friday for both weeks during that period
• Payment deadline: Thursday, September 25

Example 3

Paid in arrears works similarly for salaried individuals. Here’s an example where Naveen Head is a salaried professional paid monthly. His employer may pay him on the tenth of every month for work completed the previous month.

Because he’s salaried, his employer may not need to determine the total hours worked. However, they likely monitor PTO used, benefits paid and other payroll administration.

Example 4

This example shows a paid in arrears situation outside of regular payroll processes.

Every week, a cleaning company deep cleans a real estate agency in town. At the end of the month, the cleaning service sends the real estate agency a bill for the completed services during that period. The agency pays in arrears.

Example 5

Here’s another example of how contract labor is often paid in arrears.

A company hires a freelance writer to create website content and email templates. The writer completes the work and sends an invoice after delivery, requesting payment in arrears with net 15 terms. These terms require the employer to issue payment within 15 days of receiving the invoice.

Types of payment in advance

While payment in arrears is common, particularly in payroll processes, businesses may need to make certain advance payments. For example, an advance payment can cover an entire project or period of work. Other scenarios require rolling advance payments as contractors complete milestones.

Here are a few types of advance payments:

Salary advance

A salary advance is a short-term loan given to an employee, allowing them to access their wages before the scheduled payday. You pay your employee a lump sum, and they pay it back over several weeks or months from their future earnings. Employees usually pay salary advances back via deductions from their paychecks.

Retainer

When you pay someone on retainer, you pay them in advance for a certain number of billable hours or services. A retainer agreement is a work-for-hire agreement rather than a traditional employment contract. Some independent contractors offer discounts if clients pay retainer fees instead of using traditional invoices.

Paid current

Paid current isn’t technically paid in advance, but it’s faster than paying in arrears. It means you pay an employee or an independent worker at the end of a workday or at random intervals throughout a pay period. Some companies give employees flexible access to the wages they’ve earned rather than making them wait for a specified payday after the pay period ends.

Considerations for payment in arrears

Reviewing the various ways to handle payroll can help you decide what’s best for your organization.

Some perks of paying in arrears include:

• Payroll accuracy: When you pay employees for work they’ve completed, you don’t need to estimate or project their workload. You can calculate pay based on actual worked hours, increasing payroll accuracy.
• Extra time to manage payroll: Handling payroll in arrears means you typically have several days between the last day worked and payday, ensuring you have time to process payroll with proper calculations for PTO, benefits and other factors.
• Lower risk of losses: If you pay in advance, you risk compensating workers for uncompleted projects.
• Improved budgeting: Paying in arrears lets you set pay periods and dates. You know when the funds will leave your business account, so you can plan accordingly. You can also budget for an average amount each payday.

Considerations for payment in advance

Consider these factors before opting for the payment in advance method:

• Fast access to pay: Employees don’t have to wait to be paid, which may help them pay their bills quickly and boost employee morale.
• Employees’ needs: Some paid in advance options can help employees under financial strain. A salary advance may help cover an unexpected, urgent expense for one of your team members, such as an unplanned surgery or vehicle maintenance.
• Established trust: If you work with freelance employees, you can establish trust by paying them in advance or paying retainers. Offering milestone payments can build trust and financial security for contract workers.

Best practices for payroll

Paying your employees on time helps establish a healthy workplace. Use these best practices to respect employees’ time and financial needs:

• Choose your method: Decide between paying in arrears and paying in advance based on your business structure and employees’ needs.
• Document it: Create a written company policy that details how and when employees are paid. Include a chart of pay periods and paydays during onboarding processes to help employees understand the pay schedule.
• Create procedures: Establish procedures for managing special pay options, such as payroll advances. Make sure every employee is treated fairly as requests for special pay options are considered.
• Support compliance: Review federal and state payroll requirements, as regulations can vary by location.