If your company pays biweekly, you will end the 2017 calendar year with an extra pay period. In other words, your employees will have been paid 27 times this year rather than the typical 26. No, this is not a scam. It is really just an optical illusion created by the calendar.
What those of us in the payroll industry refer to as 'payroll leap year' can be a pesky little problem when it comes time to explain to workers the details of their annual salaries. 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. To that end, we explain the details of payroll leap year below.
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.
You should have a good idea of where this is going. 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 you know how it works, you have a number of options for processing payroll during those leap years. Whichever option 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.
- Adjusting the pay schedule so the final week of pay in 2017 is not actually paid until the first week of January.
Regardless of the chosen option, it is imperative that tax withholding and reporting lines up with what employees are actually paid in a given calendar year. Bear in mind that tax withholding and reporting is pay period independent from the IRS' perspective. Whatever an employee actually receives during the year is subject to payroll tax withholding.
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 work days; only the timing of payments is affected.