In some years employers have to deal with an extra pay period if they pay on a bi-weekly basis. For example, the leap year in 2020 could create an extra pay period, especially if you pay employees on a Tuesday.
Why the extra payday in some years?
We think of the calendar year as being 52 weeks, but it's actually 52.1786 weeks. For bi-weekly payments (every other week), it's 26.0893, not just 26. In some years, the additional fractions add up to create an extra week.
Who Does This Extra Pay Period Affect?
Two kinds of pay periods for salaried employees are often confused. The pay for these employees is annual pay, paid monthly, semi-monthly, or bi-weekly. Semi-monthly is twice a month, resulting in 24 payments in a year, while bi-weekly is every other week, resulting in 26 payments in a year.
The extra pay period affects salaried employees who are paid bi-weekly (every other week). Here's an example:
Jerry is a salaried employee paid $28,000 a year, on a bi-weekly pay basis. Each pay period during a "normal" year of 26 pay periods, he receives $1076.92. But if there is an extra pay period in a year, he would receive an extra paycheck, more than his actual salary.
Communicate the Change!
Communicate the change! No matter what payroll option you take for some years, you will need to let employees know what you are doing. Send them an email or a letter at the beginning of the year and also when you distribute W-2 forms to employees for income tax reporting purposes.
Some Options for a 27-Pay-Period Year
Option 1: Divide the total salary among the 27 pay periods for that year, rather than 26. It will result in smaller amounts in each paycheck. In Jerry's case, his bi-weekly pay for that year would be $1037.04 ($28,000). You would have to do this starting at the beginning of the 27-pay-period year.
Option 2: Do nothing. Pay the same amount each payday. Because of the extra payday, you will effectively be giving employees a slight increase. This is the easiest option, but the most costly for you.
If you take Option 2, inform employees so that you can take credit for the increase. Also, be sure to inform the employees that their pay the following year (the year after the "27-pay-period year") will be reduced because they will be back to being paid over 26 pay periods.
According to HR consulting firm ERC, most employers (86%), use the pay-as-usual option.
Option 3: Use the actual multiplier in every year. For bi-weekly pay periods, it would be 26.0893. In John's case, this would result in payments of $1,073.23 each pay period, for a total of $27,904.16 in a 26-pay period year (a loss of $95.84 for the year) and $28,977.21 in a 27-pay-period year, an increase of $977.21 for the year.
The benefit of using the actual multiplier every year is that you wouldn't have to re-calculate every year. You would still have to make an additional payment to employees in a 26-pay-period year to bring them up to their stated salary. You would also have an increase in a 27-pay-period year, but not as much as if you used option 2.
You can't skip a payment date or significantly reduce the last paycheck for employees in a 27-pay-period year. If John was paid his normal $1076.92 for 27 pay periods, his total pay for the year would be $29,076.84, $1,076.84 more than his stated salary of $28,000. So you might be tempted to just skip that payment. Don't do it. No may be violating wage laws, and a missed paycheck, especially around the holidays, can cause negative morale.
Your Decision Has Other Effects
The amount of pay will affect the total Social Security and Medicare you and your employees pay. Some employees may reach the maximum Social Security contribution earlier and may reach the threshold for the additional Medicare tax if you make an additional payment.
Paying additional salary may also result in paying additional benefits. For example, you might be over-funding someone's 401(k) with the extra pay period, beyond the maximum allowable amount. If that happens, you would have to give back the money to the employee.
Tax Year for W-2s
Having a pay period extend over the end of a year brings up the issue of which year's taxes the payment is in. The general rule is that the tax should be on the W-2 for the year when the paycheck is issued, and the employee has use of it.
Another Option: Using a Payroll Service
The decision how much and when to pay employees is always tricky. It has many legal and accounting pitfalls. Before you decide how to handle a 27-pay-period year, talk to a payroll tax expert and an employment law expert.