2021 Payroll Frequency Phenomenon
In any year with 365 days, there will be six days of the week that occur 52 times and one day of the week that occurs 53 times. This causes the chance of having an additional payroll when paying employees on a weekly or bi-weekly structure, especially when it effects the number of Fridays in a year, since Friday is the most common pay day of the week. Employers that pay weekly each Friday or bi-weekly with an upcoming payroll date of January 1, 2021, will be affected by this phenomenon.
When there is a 53 or 27 pay-period year, you have three options:
- Divide the total salary by 53 or 27 for the whole year and adjust wages accordingly. Wages would then change back to the regular basis of 52 or 26 payrolls the following year. This option is not very common since most employees would view this as a decrease in pay.
- Do nothing. Pay the same amount as usual, essentially giving employees a slight increase. This option is easiest and most common but also costly. You can inform employees of this and take credit for the increase.
- Use an actual multiplier in every year. This method regulates pay so you don’t have to change it, but slightly underpays employees during regular years and overpays them during ‘extra’ years. Overall this option works out accurately if the employee works for you for several years.
Whether or not this additional paycheck will need to be accounted for in 2020 or 2021 will depend on how you handle pay dates that fall on bank holidays. Most employers choose to move payroll up one day so their employees are paid the day before the holiday. If you choose to move the January 1, 2021 pay date to December 31, 2020, this will cause one additional payroll in 2020. If you slide the January 1, 2021 pay date to the following business day, the additional payroll will land in 2021.
Employer Tax Planning Considerations
As far as the increased wage and employer tax expense, those employers with a cash basis for tax purposes may need to consider tax planning to determine if it is better to pay in 2020 or 2021. For accrual basis employers, this should all come out in the wash since you are more than likely posting accrued wages and utilizing liability accounts. It is important to note that if you have a standard practice of handling payrolls that land on holidays, it should not be altered for tax planning purposes. Regardless of the employer reporting basis, the W2s for salaried employees will appear as if they were overpaid during the year in which the additional payroll is paid. This should be communicated to employees to lessen confusion and questions as these forms go out.
Employee Deduction and Contribution Considerations
In addition to this issue affecting wages and employer taxes, it could also have an effect on deductions and contributions. For instance, if insurance premium deductions were based on 52 payrolls for the year but 53 payrolls are paid, you will have over-collected from employees. One way to deal with this is to block voluntary deductions and contributions on the final paycheck. Employees will more than likely not want to block 401(k) contributions, but if they have planned to max out their FSA, HSA, or 401(k) and their per pay period contribution is based on 52 or 26 pay periods, it could inadvertently result in ineligible contributions. Some employees also choose to set their contributions based on a fixed goal amount, so having an additional payroll added in the year will result in their contributions coming in over their goal.
Action Steps for Affected Employers
- Determine how the holiday pay date will be handled and whether this causes the additional payroll to be paid in 2020 or 2021.
- Verify how many payrolls cycles were used when calculating deductions and contributions for 2020.
- Recognize if there is a potential issue that would require you to block voluntary deductions on the final paycheck of 2020 or if you need to calculate deductions based on an additional paycheck in 2021.
- Communicate with salaried employees that wages will be higher on their W-2 that includes the additional paycheck. Communicate with all employees affected by blocked deductions or contributions.