Do You Have an Extra Pay Period Next Year?
When planning for a new calendar year, we often forget there could be an extra pay period for the upcoming year. Planning ahead prevents any last minute scrambling you may have to do for that extra pay.
What causes an extra pay period you ask? It is simply the calendar. Yes, that may be over simplifying it, but remember a calendar year has 365 days, so one day of the week will occur 53 times. During leap year where there are 366 days, two days will occur 53 times. This situation will occur every 11 years for a bi-weekly payroll and every 5 or 6 years for a weekly payroll. It all depends on the day of the week on which your company pays its employees. This situation will not occur for employees paid Semi-Monthly or Monthly because they are always paid an even number of times during a year – their pay is not based on a day of the week.
Below is the day of the week where the extra day falls:
- 2010 – 53 Fridays
- 2011 – 53 Saturdays
- 2012 – 53 Sundays and Mondays
If your pay day falls on one of these days and you pay weekly or biweekly, you will have an extra payroll to consider.
Planning, Planning, Planning is a MUST. The first item to be addressed is what are my options and which option does our company want to use.
There are four options that may be used to deal with the extra pay period.
- Do nothing
- Change the employees’ pay for 53 pay periods
- Change the standard hours used for calculating rates
- Change the pay cycle
Let’s look at how these four options are handled and how they could affect the work for payroll, accounting, and the employees’ pay.
What does “do nothing” mean? Just that—you would pay each employee an extra pay for the year, resulting in a larger annual salary than they are budgeted for. While this will add extra cost to the company, it is the simplest and the most commonly used. Since accounting typically accrues the payroll, the bottom line impact is generally not as significant as one might think. However, one thing to keep in mind is union contracts, employee company offer letters and any company policies regarding an employee’s pay. One area, that can be dealt with is for deductions and employer provided benefits. These would not need to be withheld or applied to the extra pay.
To change the employees’ pay to handle the 53 pay periods will require changing the rate of pay for every employee in the payroll master. The calculation for weekly employees would be 53/40 and for biweekly it would be 27/80. Once the year is over, payroll would need to go back to the employee master file and change the rates of pay back to the standard 52 week payroll year. Also to be considered are deductions and employer provided benefits. There are a couple of options here and that would be either not withhold deductions for the extra pay period, or adjust the amounts to coincide with the additional pay period—same as changing the rate. Employer provided benefits for taxation would be handled in the same manner.
Changing the amount of pay for an employee can also have repercussions. This will result in payroll answering numerous questions on how the calculation was made and may also result in dissension among employees. Many employees live week to week and reducing any amount from their pay could be considered detrimental to them. Consider employer-employee relations carefully before you make your decision.
The third option your company might consider is to change the standard hours used for calculating the rate of pay. We normally take an employee’s annual rate of pay and divide it by 2080 hours to get the hourly rate of pay. In this option the annual salary would be divided by 2088 hours which takes into account the extra day that creates this extra pay for the year. This option is rarely used, but could be found in the public sector or higher education organizations. Basically, the same steps would be required as option 2 and you might anticipate the same negativity from employees.
The last option is to change the pay frequency to Semi-Monthly. By doing this, the extra pay will be a non-issue. Making this statement is “easier said than done”, and will require due diligence on your part to analyze this option’s benefits/risks for your company.
You will want to do a cost analysis of the money that can be saved by reducing the number of payrolls processed in a year. If you are currently paying weekly, you have 52/53 payrolls, but if you pay semi-monthly you would only have 24 payrolls. If your company is still using paper checks, mailing or sending overnight packages, using an outsource company, these costs can be reduced by changing to a Semi-Monthly frequency.
The analysis to change the pay frequency to Semi-Monthly also needs to include your financial personnel, and possibly shareholders if the company is publicly traded. They need to look at the accrual process, which could be eliminated, but also the general ledger fiscal period. Some companys follow a calendar month, but others may use a 4/4/5 fiscal period.
Next, it is necessary to determine who will be changing to the semi-monthly frequency: only exempt personnel, or will it also include non-exempt? When will the change over take place and how will you explain the change to employees? This process needs to be carefully planned and communicated to everyone involved.
Finally, remember the extra pay period needs to be planned in advance. All the options, costs or costs savings, effects on employees, payroll and accounting need to be carefully considered. Chose the option that is best for you and do it early in the calendar year.