How Does Leap Year Affect Payroll?
A leap year adds one extra day in the calendar year and will increase the possibility of an extra pay period, depending on your business's pay date and frequency.
Leap years only impact salaried employees who are paid weekly or biweekly and do not affect salaried employees who are paid semi-monthly or monthly and hourly employees.
Please note that an extra pay period might occur in a normal calendar year as well, not just in a leap year. This is because the number of pay periods in a year is determined by each company's payroll frequency and date. Employers should make sure to calculate the number of pay periods each year and make sure to take actions to adjust payroll if there's one extra pay period.
How Does Leap Year Affect Salaried Weekly or Biweekly Paid Employees?
Normally, a calendar year has 365 days, over which weekly paid employees receive 52 paychecks per year and biweekly paid employees get 26 paychecks per year. But if you do the math, you’ll see some unaccounted overage:
- 365 days / 7 days = 52.14 (weekly)
- 365 days / 14 days = 26.07 (biweekly)
Over time, those extra fractions add up, resulting in 53 paydays for weekly paid employees and 27 paydays for biweekly paid employees. Therefore, the potential for an extra payday is present in both leap and nonleap years.
Here’s the bottom line: A nonleap year has 365 days, in which six days of the week happen 52 times and one day happens 53 times. However, a leap year has 366 days - due to February having 29 days instead of 28 - in which five days of the week happen 52 times and two days happen 53 times. So, a leap year has two extra days, increasing the chances of an additional payday for salaried employees who are paid weekly or biweekly.
Why Aren’t Hourly Employees and Salaried Employees Paid Semi-Monthly and Monthly Impacted by Leap Years?
Salaried employees who are paid semi-monthly will receive 24 paychecks each year, while salaried employees who are paid monthly will receive 12 paychecks, regardless of whether it's a leap year or not. Further, hourly employees are paid according to the actual hours worked, not based on the number of days or number of pay periods in a year.
How Does the 2024 Leap Year Affect Payroll?
In 2024, there are 53 Mondays and 53 Tuesdays. Therefore, if your salaried employees are paid weekly or biweekly on a Monday or Tuesday, they might get an extra paycheck.
For example, salaried employees who get paid biweekly on every other Monday typically receive 26 paychecks per year. However, since 2024 has an extra Monday, these employees will get 27 paychecks for 2024.
How to Manage Leap Year Payroll?
Generally, there are five ways to handle the extra pay period in a leap year or certain nonleap years.
1. Keep Everything As Is
Don't do anything. This could result in salaried employees paid weekly and biweekly receiving more money because they will be receiving an extra paycheck at the same regular amount.
Companies should be aware that choosing this approach will increase the company's labor cost of the year because employees are paid slightly more. Companies should also inform employees that their annual salary increase is caused by the leap year and will fall back to the regular amount the next year.
2. Prorate Salaries with the Number of Pay Periods
You can also adjust the amount of each paycheck by dividing the annual salary with the number of pay periods in a leap year. For example, for employees paid weekly, divide the annual salary by 53 instead of 52. For employees paid biweekly, divide the annual salary by 27 instead of 26. This will slightly decrease the amount of pay in each paycheck, but will even out to their normal annual salary at the end of the year.
Employers should be mindful of how this change might affect their employees. A decrease in each paycheck might put financial pressure on employees and affect their ability to pay bills and cover other regular expenses.
Employers should also make sure this change does not result in incompliance with the Fair Labor Standards Act (FLSA). Although the law does not have specific regulations on leap year, dividing an exempt employee's annual salary by 53 or 27 could cause their weekly salary to fall below the federal or state threshold. As a result, it might cause violations related to overtime, meal breaks, and rest breaks.
3. Prorate Salaries by a More Accurate Multiplier
Divide employees' annual salary using a more accurate multiplier. So instead of using 26 or 52, divide the salary by 26.0893 or 52.1786. This method will ensure each paycheck is of the same amount and an extra pay period will not affect your payroll.
Please note that this method will cause fluctuations in annual salary received by employees. In the cases where employees are paid less than their annual salary in the end of the year, employers might need to pay the difference (if salary is stated in the form of annual pay in the employment contract).
4. Reduce Employees' Last Paycheck of the Year
Employers can also reduce employees' last paycheck of the year to match their annual salary. This approach will not affect employees' pay in each paycheck except for the last/extra one or increase the company's labor cost. However, companies will need to go into their payroll software and make the corrections for each employee.
5. Change Your Payroll Frequency or Date
You can also consider changing your payroll frequency or date to avoid the impact of a potential extra pay period. For example, changing payroll frequency from weekly or biweekly to semi-monthly or monthly will set a fixed 12 or 24 pay periods in each year. Otherwise, changing your pay date every time an extra pay period occurs can also solve the problem.
Navigating the Extra Pay Period in a Leap Year
Whether it's a leap year or a nonleap year, companies need to calculate the number of pay periods of the year ahead of time and make necessary payroll adjustments when an extra pay period occurs. Whichever option you choose, there are some general principles to follow.
Review Offer Letter, Employment Contract, and Collective Bargaining Agreement
Review your offer letters, employment contracts, and collective bargaining agreements carefully before making any changes to payroll. Pay specific attention to how they address compensation and what the rules are for each employee. For example, if your employment contract specifies how much annual salary an employee will receive, solution #3 above might not work for your company.
Ensure Compliance for Other Things Connected to Payroll
Changes in payroll will likely also impact special wage payments, health plan deductions, income tax withholding, and other benefit contributions. Companies need to review how these deductions or contributions were scheduled to ensure compliance.
Review Your Payroll System
Review your payroll system and make sure it's configured to account for the extra pay period in leap years. Make it an annual practice to review the upcoming year in advance, keeping an eye out for any leap years on the horizon. Take the time to carefully assess your payroll system's settings, ensuring that it seamlessly accommodates any potential additional pay period and accurately withholds taxes. You can always consult with a payroll provider for more support.
Communicate the changes to your employees
Make sure to inform your employees up front so they know what to expect. Explain the reasons for the change and how those changes will affect their paycheck and pay schedules.
Keep Accurate Records
It is crucial to keep detailed and precise records of payroll and tax withholdings for the extra pay period. This not only ensures compliance but also provides essential documentation in the event of an audit.
