With 2020 comes an extra day, and for some employers, this presents a challenge. Depending on how the calendar falls, and how often you process payroll, this could mean an extra payday.
While the upcoming leap year draws attention to this issue, an extra pay period isn’t unique to leap years. In both leap years and non-leap years, there’s potential for an extra pay period because 365 days don’t divide evenly into 52 weeks. Rather, it’s 52.1429 weeks, which means there’s one extra day of the year in regular years when it comes to payroll. And in 366-day leap years, there are two extra days, which increases the likelihood that you will have to deal with an extra payday.
Who does this impact?
If you’re processing payroll on a weekly or bi-weekly basis for salaried employees, you (and they) may have an extra payday. Let’s look at an example:
Jane is a salaried employee who gets paid every other Wednesday, so she normally has 26 pay periods. But, in 2020, an extra day falls on a Wednesday, which means she has 27 pay periods. This results in an extra paycheck for Jane.
How should employers handle the extra pay period?
Good question. At first glance, it might seem like the extra pay period will result in an increased salary for employees. However, that’s just one of your options. You can:
- Pay as usual. While this option requires the least amount of effort, it’s more expensive. For years with an extra payday, employees will receive an increased salary. At the same time, you’ll need to set expectations. Let employees know the special circumstances, so they don’t expect an increased salary every year.
- Divide salaries by the number of pay periods. For bi-weekly pay periods, you’ll need to divide the total salary by 27, rather than 26. And for weekly pay periods, you’ll divide the total salary by 53, rather than 52. This will result in smaller paychecks, so you should give employees an explanation so they know what to expect. Of course, this can negatively affect employee morale, so take that into consideration. Should you choose to go this route, ensure you’re compliant with the federal Fair Labor Standards Act (FLSA) and any relevant state minimum wage laws.
- Reduce the final paycheck of the year. A third option is to reduce the final paycheck of the year. However, you’d have to make sure that you’re still compliant with FLSA and state minimum wage regulations. On top of that, you’d need to set expectations with employees so they know to expect a reduced end-of-year check. Because of the complications, this is the least popular of the options.
No matter which option you choose, remember employee communication is key. If employees know what to expect, they’re less likely to be disappointed. Nobody likes surprises when it comes to their salary.
Are there other considerations to keep in mind?
Yes. The extra pay period requires considerations beyond salary, including:
- Payroll taxes. The amount you pay employees will impact the total Social Security and Medicare taxes your employees pay.
- Benefit deductions. The extra pay period may impact benefit contributions to 401(k) plans, health savings accounts (HSAs) and flexible savings accounts (FSAs). Again, inform employees of the extra pay period as this may impact how much of each paycheck they want to put toward these benefits.
Planning ahead for payroll adjustments
With 2020 upon us, you’ll need to be sure you or your payroll and time-and-attendance systems are ready for the extra day — February 29th. Along with that, you’ll have to ensure all payroll and benefits deductions are properly accounted for.
Preparing for an extra pay period can be tricky, but it doesn’t have to be. Thankfully, payroll software solutions like Orbit Payroll make it more straightforward. Since it’s programmed and ready for the extra day, you can be sure you’re prepared for the leap year. To find out more about how Orbit Payroll can simplify your payroll processing, get more information here!