How to Overcome the Leap Year Payroll Challenge 

There’s a lot of buzz these days surrounding “leap year payroll,” and that’s no surprise since 2020 is a leap year.

For some employees, a leap year means an extra paycheck. For employers, however, it’s a massive headache from a payroll perspective.

The good news for employers — and perhaps disappointing news for some employees — is that not all payrolls are affected by leap years. In fact, the extra payday phenomenon applies only to salaried employees who are paid weekly or biweekly.

Read on for an up-close look at leap-year payroll, and for tips on navigating your small-business payroll during the 2020 leap year.

How leap year affects payroll

The first thing to know is that an extra payday isn’t restricted to leap years, as it can happen in non-leap years as well.

The non-leap-year effect

Typically, a weekly payroll has 52 paydays and a biweekly payroll has 26 paydays. However, a non-leap year has 365 days, which technically amount to 52.14 weekly (365 days / 7 days) and 26.07 biweekly (365 days / 14 days).

Those extra points add up over time, culminating into an extra paycheck. For salaried weekly-paid employees, the extra payday happens every 5 or 6 years; for salaried biweekly-paid employees, it happens every 11 or 12 years.

The leap-year effect

In a leap year, February has 29 days instead of 28 days, resulting in 366 days — where 5 days of the week occur 52 times and 2 days occur 53 times. (Note that in non-leap years, 6 days of the week happen 52 times and 1 day happens 53 times.) The additional 2 days in leap years increase the chance of an extra payday.

See chart below for a side-by-side comparison of 2019, 2020, and 2021:

As you can see, 2019 had an extra Tuesday. Therefore, if your weekly or biweekly payday for salaried employees fell on a Tuesday, you had an extra payday.

The probability of an extra payday is even greater in 2020 because 2 weekdays (Wednesday and Thursday) happen 53 times. So, you will have an extra payday in 2020 if your payday for weekly- or biweekly-paid salaried employees falls on any of those 2 days.

Note that 2021 has an extra Friday, and New Year’s Day in 2021 falls on a Friday. If you push back your payday for New Year’s Day to Thursday, Dec. 31, 2020, your extra payday will happen in 2020. But if you don’t push it back, you will still have an extra payday — in 2021.

There’s no extra payday for employees who are paid hourly, semi-monthly, or monthly. 

Hourly employees are paid based on time worked; the number of days in the year is irrelevant. A semi-monthly payroll has 24 pay periods annually and a monthly payroll has 12 pay periods annually — regardless of the number of days in the year.

Managing your small business payroll in the 2020 leap year

You can resolve the extra payday issue via one of the following 3 methods.

1. Take no action

Just keep paying your employees as usual. This means your weekly- or biweekly-paid salaried employees will literally get extra money for the year. Studies show that most employers (86%) choose this option, regarding it as administratively easier and better for employee morale, despite the increased cost of salaries. If you take this route, let your employees know that the additional pay is solely because of the extra pay period and their salary will return to normal in the next year.

3. Divide salaries by the number of pay periods — that is, 53 for weekly payrolls and 27 for biweekly payrolls

In this case, employees’ gross salary per payday will be a little less than usual, but by the end of the year it should add up to their regular salary. If you choose this option, let your employees know from early that their gross salary for the pay period will be less than normal. Also, make sure you’re not violating any employment contracts or wage-and-hour laws.

3. Decrease only the final paycheck of the year

This tends to be the least popular alternative among employers because it’s fraught with legal risks, including potential minimum wage violations — especially if the employee is salaried, nonexempt. Moreover, even if you tell employees upfront to expect a reduced paycheck at the end of the year, they still might not react well when it actually happens, mainly because they’ve been receiving their regular pay for so long throughout the year.

Regardless of which option you pick, make sure your payroll system is constructed to facilitate that method. The system should also factor in paycheck deductions, such as for payroll taxes and voluntary benefits.

Payroll taxes

If your payroll system does not account for the extra payday, you could end up under-withholding federal income tax for your employees. The same goes for applicable state and local income taxes. Further, pay attention to taxes with an annual wage limit, such as Social Security tax or specific state taxes, plus high income that could trigger additional Medicare tax.

Voluntary benefits

Paycheck deductions for certain voluntary benefits, such as health insurance, are usually figured according to the number of pay periods in the year. To avoid employees over-paying for such benefits in years with 27 or 53 paydays, you can either stop the deduction from occurring in the extra pay period or recalculate the amount.

Also, some benefits have annual contribution limits — such as 401(k), health savings account, and flexible spending account. If applicable, let your employees know how the extra payday will impact these benefits so they can adjust their contributions as needed.