Every four years, businesses must account for the phenomenon of an extra pay period. As such, weekly payroll inflates from 52 to 53 check dates, while biweekly payroll increases from 26 to 27.
The reason is simple: In 2016, Jan. 1 will land on a Friday, meaning if you pay on a biweekly schedule, you could have 27 check dates in 2015 or you can choose to roll the 27th check date into 2016. Regardless, one of the two years will have an extra pay period.
For businesses that elect to have the extra pay period in 2015, the first pay date will be Jan. 2 and the last pay date will be Dec. 31. While that last pay date technically falls on Jan. 1, 2016, that is the New Year’s holiday, meaning banks are not open to process transfers; therefore, organizations must pay their employees one day in advance.
The great divide
Not all employers elect to handle the extra pay period the same. Some companies may choose to divide their total yearly salary by 27 rather than 26 to ensure even distribution, while others may consider the extra pay period as a “bonus.”
However, employers may not have a choice. Before choosing your plan of action, look at your staff’s employment agreements:
- If those documents specify a specific weekly or biweekly salary, the choice has been made for you: You must pay employees a “bonus” paycheck in 2015.
- If those documents specify an annual salary only, then you have options on how to tackle the additional pay period.
Should you choose to do nothing, employees will receive an increase between 2 percent and 4 percent on their paychecks; however, this also may impact 401(k) plans and Medicare tax withholdings.
Employers who elect to divide the total salary by 27 must note that employees’ checks will be slightly less each pay period. That lower salary amount could put lower-paid employees below the current $445 threshold and jeopardize their exempt status under the Fair Labor Standards Act.
How does that affect business?
When preparing your plan to tackle the forthcoming additional pay period, keep in mind these four important factors in order to keep operations running as normal:
- Scheduled Earnings and/or Deductions – Scheduled deductions and earnings will appear on every paycheck. If your benefits are calculated on 26 pay periods, then an extra deduction could be taken out of employees’ paychecks. Earnings and deductions set to pay or deduct to a certain limit may meet that limit early.
- Accruals – If you have annual limits set up on accruals, you may want to consider adjusting the limit to accommodate the extra paycheck. If you choose not to take action, the accrual will stop at your current set limit and may cause an employee not to accrue on the 27th paycheck.
- Benefits – Should you choose to do nothing different, employees at the top of the income scale may hit the withholding limit for Social Security early, and the extra pay period also may trigger additional Medicare tax withholdings. In addition, 401(k) or other retirement contributions could exceed the annual limit, triggering penalties for employees or a need to issue refunds.
- Budget – When setting budget plans for 2015, be sure to consider the extra pay period; otherwise, it could throw your numbers off come year-end.