Every so often, the calendar causes us to have to watch what we are doing. In some years, most recently 2009, employers will have to deal with an extra pay period, if they pay on a bi-weekly basis. How does this happen? If you pay every other Thursday, you will have 27 periods in some years. Or, if you pay on Fridays and you pay the day before a holiday, you will also end up with 27 pay periods, because Christmas falls on a Friday.
So if you started counting and figured out that you will be paying salaried employees over 27 pay periods in a year, you probably realized that, if you do nothing different, you will be paying them more in a year than you might have intended. So what do you do?
The American Institute of Professional Bookkeepers (AIPB) has some suggestions:
Option 1: Divide the total salary among the 27 pay periods rather than 26. This will result in smaller amounts in each paycheck. if you want to do this, be sure to inform your employees, so they don't complain.
Option 2: Pay the same amount in each pay period as you did in the previous. This will result in an effective increase in pay for these employees. If you do this, inform employees, so you can take credit for the increase. If you do this, you should also inform the employees that their pay the following year (the year after the "leap year") will be reduced, because they will only be paid over 26 pay period. Paying extra in one year may also affect the Social Security maximum and the additional Medicare tax withholding for some employees.
Option 3: Adjust the last paycheck of the year so that the total pay for the year is the same as the prior year.
In any of these circumstances, you will need to inform employees what you are doing, both before the end of the year and when you distribute W-2 forms to employees for income tax reporting purposes.
Some other considerations you will need to be aware of:
The amount of pay will affect the total Social Security and Medicare you and your employees pay. Some employees may reach the maximum Social Security contribution earlier and may reach the threshold for the additional Medicare tax (0.9%) with this additional payment.
Paying additional salary may also result in paying additional benefits. For example, you might be over-funding someone's 401(k) with the extra pay period, beyond the maximum allowable amount. If that happens, you would have to give back the money to the employee.