We explain why weekly and biweekly payers occasionally have an additional payroll period and the impact it can have.
It’s that time again where a number of employers are noticing more than the usual number of paydays for the year. This predictable extra payday raises questions for employers and their employees. Here we explain why weekly and biweekly payers occasionally have an additional payroll period, the impact it can have on budget and wages, and procedural matters to be considered.
The additional payroll period will generally always result in higher-than-normal annual wages for nonexempt employees; however, whether the same is true of exempt-salaried employees depends on how their payroll period salaries are determined. There are three approaches for computing the weekly or biweekly pay of exemptsalaried employees, with each having a different budgetary result. The method used by a business depends on contracts or policies provided to employees (e.g., whether a salary agreement specifies a biweekly or annual salary).
- Recompute the annual salary in the year of an additional payroll period
- Do not recompute the annual salary in the year of an additional payroll period
- Use the exact calendar-year divisor of 26.0893 or 52.1786
Income tax withholding
In the year in which there is an additional payroll period, weekly and biweekly payers should consider if an adjustment is needed to their income tax withholding formulas. Although the IRS does not specifically require that an adjustment be made when there are 27 or 53 payroll periods in the year, employers should consider the potential for withholding too little federal income tax if this change is not made. (IRS Publication 15, page 44.) Further, state and local income taxes may be more significantly impacted, and relief from underwithholding penalties may not apply.
Don’t forget to readjust calculations in the subsequent year. Employers must be sure to count the number of pay periods in each tax year to determine if an adjustment in the income tax withholding computation is necessary. If there was an additional pay period in one tax year, and the computer formula was modified to take into account the additional pay period, be sure to change the computation back to a pay period wage multiplication of 26/52 and a division of the annual tax by 26/52 for the subsequent tax year.