While February typically has 28 days, in leap years—such as February 2020—it contains an extra day. Employers who pay their salaried employees every week or every two weeks will encounter a year in which there is one payday more than usual. These employers should plan ahead to identify and address these "payroll leap years" in advance. It has been our experience that it is best to keep clients informed of pending leap years so that they can keep their employees informed as well.
Payroll Leap Year Explanation
Hourly employees or their salaried counterparts who get paid semi-monthly do not have to worry about payroll leap years. However, salaried employees paid either weekly or biweekly do. Why? Because a payroll leap year creates a situation in which they earn more than their annual salary in any year it occurs, then less the following year. The total amount is the same over the course of both years, but not in the individual years.
To make this easier to understand, consider the following:
- A weekly pay cycle consisting of 52 seven-day weeks results in pay covering 364 days per year.
- The same holds true for biweekly pay; it covers 364 days per year.
- This leaves one extra day because a calendar year is 365 days.
When you combine the one extra day per year along with a traditional leap year that adds an extra day to February every four years, you end up with a cycle that creates an extra full week – for payroll purposes – every 5 to 6 years.
Employees who are paid weekly will enjoy an extra week of pay every 5 to 6 years while those who are paid biweekly only see the extra week every 11 years.
Options for Addressing Payroll Leap Year
Now that the leap year and the effects it has are explained, you have a few options for processing payroll during these leap years. Whatever decision you choose, be prepared to explain your choice to employees who might discover they earn more than their annual salary in a payroll leap year.
Your options are:
- Making the extra payment in the leap year, followed by one less payment the following year.
- Adjusting paycheck amounts to cover 27 weeks instead of 26, resulting in smaller paychecks.
- Adjusting the final paycheck of the year along with the first check of the following year so that annual salary remains the same for both.
The payroll leap year is a relatively new issue created by moving to a weekly or biweekly payroll processing model for salaried employees. In the end, the overall effect of payroll leap year does not harm what employees actually earn. They are still getting paid for the same number of workdays; only the timing of payments is affected.
Another solution some favor is to change from a paycheck every two weeks to a twice-per-month paycheck, although employers would need to adjust benefits deductions accordingly.
Which Employees Will Be Impacted
Employees who are paid on a weekly or on a bi-weekly basis are impacted.
Regardless of which option you choose, remember employee communication needs to take place. If employees know what to expect, they're less likely to be disappointed.
In a year with an additional payroll period, consider the effect on payroll deductions and special wage payments. For instance, health plan premium contributions should, if necessary, "either be adjusted to take into account the additional period or suppressed in the additional payroll period. A similar consideration applies to special wage payments that are based on 26/52 payroll periods, such as child support payments garnished from an employee's wages.
Employees should understand how an extra pay period could affect benefit contributions to:
- 401(k) Plans
- Health Savings Accounts (HSAs)
- Flexible Savings Accounts (FSAs).
Inform employees that they may want to reevaluate that extra pay period since it may affect how much they wish to defer from each paycheck into their 401(k), HSA or FSA.
Payroll Systems Adjusted
Tax withholding is typically calculated using a set of predetermined tables from the IRS and state tax agencies. However, in a year when there's an additional payroll period for an employer, weekly and biweekly payors should ensure that automated payroll systems adjust tax withholding, generally based on 26/52 payroll periods, to reflect 27/53 payroll periods.
For more information on the above article or any human resource management services, please contact Amber Malik at (334) 321-4729 or by leaving us a message below.