2020 is a leap year, which has the potential to throw off a pay date schedule. However, extra pay periods can (and do) happen, even when there isn’t a leap year. If an employer pays its employees on a weekly or bi-weekly basis, here’s what HR and payroll professionals need to keep in mind when this phenomenon occurs.
The extent of the impact of the extra pay period will depend on the status of the employee and how the employee is paid. For exempt employees, they will be affected by earnings, withholding tax, and deductions. On the other hand, nonexempt employees will only be impacted by withholding tax and deductions, and not earnings because they are compensated for each hour worked.
Exempt employees’ earnings are affected because many organizations determine the amount of the weekly or bi-weekly salary by dividing the annual rate of pay by 26 or 52. In a year when there is an extra payday, the employee will either receive 27 or 53 paychecks, so employers will need to recalculate the bi-weekly salary dividing the annual rate of pay by 27 or 53, which will result in a lower per-paycheck amount. Alternatively, the employer can use the original bi-weekly salary calculation and the employee will simply earn an extra paycheck in the year. In either scenario, it becomes very important for employers to communicate to employees the change that will occur—either an extra paycheck or an explanation that their paycheck will be lower yet their annual salary remains the same.
Minnesota employers who are required to comply with the wage theft law should also be aware that a written notice should be provided to employees prior to the changes taking effect. While it is not required to have employees sign this change notice, it is considered a good practice to do so.
The other items to be prepared to address in years where there is an extra pay period include payroll deductions and tax withholding.
Most payroll systems have been designed to divide the annualized rate of pay by 26 or 52 to arrive at the bi-weekly or weekly amount. Using a larger multiple of 27 or 53 may push the employee into a higher tax bracket, necessitating the need for higher withholdings. Failure to withhold the proper amount of taxes could result in additional taxes, penalties, and interest to the employer.
Payroll deductions can also be impacted by an extra pay period if the employer has calculated the deduction amount by dividing an annual amount by 26 or 52. The more common deduction types impacted by the extra pay period are health benefits, including medical, dental, life, vision, LTD, dependent care and medical flexible spending accounts. Other deductions to consider are garnishments and any voluntary deductions.
Being prepared and communicating ahead of time will eliminate confusion for employees. MRA members can download this guide on Preparing for an Extra Pay Period or questions can be directed to MRA’s HR Advisors at 866.474.6854 or email at email@example.com.