Remember four years ago when you dealt with a leap year’s impact on payroll? Do you remember what you had to do?
If not, here’s a refresher.
Download this free Leap Year Payroll Checklist to help you stay on track.
Payroll Impacts
A leap year introduces an extra day to the calendar, expanding it to 366 days, which means that day could wreak havoc on your payroll cycle. In 2024, both Monday and Tuesday will appear 53 times. Employers who schedule payments on those days must decide whether to adjust salaries and modify other payroll requirements such as:
Extra Disbursement Cycle
The addition of one annual day means two specific weekdays will occur 53 times, increasing the likelihood of an extra payroll cycle. Companies must consider how to address that when it impacts salary calculations, especially for those paid weekly or biweekly on a set annual income.
It also disrupts the rhythm by potentially adding an extra disbursement cycle, which can complicate your company’s budgetary planning, financial projections, and cash flow management. For example:
- Weekly: If a year begins on a Thursday — or a Wednesday during a leap year — it will result in 53 full weeks instead of 52. So, employees who are paid weekly will have 53 paydays. Pay.com says, “To determine the weekly gross pay for salaried employees you pay weekly on these years, use this formula (annual salary/53 = weekly gross pay).”
- Biweekly: Leap years can produce 27 paydays in a year. So, for biweekly salaried employees, the gross pay formula is annual salary/27 = biweekly gross pay.
- Semimonthly: Because payday falls on the same date each month and not the same weekday, the exact day you pay employees may change during a leap year. In 2024, for example, if your people get paid on the 15th and last day of each month, their last payday in February will fall on Thursday, Feb. 29 — not Wednesday, Feb. 28.
- Monthly: Since these employees get paid on the same day each month, in 2024, their February check will be on the 29th.
FLSA Compliance
Consider a salaried employee exempt from the Fair Labor Standards Act (FLSA) with an annual income of $52,000 paid every Tuesday. Without adjustments, this employee would receive an extra $1,000 that year. To avoid that, you could alter the weekly salary to $981.13, maintaining the annual wage at $52,000.
Exemption Status
In addition to FLSA compliance, dividing an exempt worker’s annual salary by 53 or 27 could cause their weekly salary to fall below the required state or federal threshold. That adjustment could impact overtime, meal breaks, and rest breaks for workers.
Employers must also ensure no contractual obligations are breached and that salaries stay above the legal minimum. For non-exempt hourly workers, they must be compensated for all hours worked, irrespective of additional pay periods.
Minimum Wage
Avoid skipping a pay period to make up the difference in hours due to the extra day. Rather, pay employees as usual, but let them know their annual salary, without a raise, will be different than the previous year due to the extra hours. Let them know their salary will revert the next year.
Taxes
The extra pay period does not change your tax filing requirements. To avoid payroll processing fines and penalties continue to withhold taxes for local, state, and federal rules; Social Security; Medicare; and any other laws that impact your company’s payroll taxes.
Additional Touch Points
- If an employee onboards on February 29, technically their work anniversary only happens every four years. Determine how that will be handled in your HR system.
- If training happens on February 29, how might that impact certification renewals going forward?
- Health plans and benefit deductions could also be impacted. You may need to block deductions during an extra pay period to avoid over-deducting.
- Employees who want to contribute the maximum amount to their 401(k), health savings accounts, or flexible spending accounts may have to adjust paycheck deductions to ensure they max out by the end of the year.
- Child support payments that are funded from employee paychecks might need to be adjusted.
How to Prepare
Keep these steps in mind when preparing a leap-year payroll strategy. Let employees know what to expect. If you are using self-service HR software, it may have solutions built in.
- Plan for an extra pay period where applicable. Also, identify how it might impact your annual payroll budget.
- Check your software to ensure it can handle the leap year adjustment accurately.
- Verify you are withholding the correct amount of payroll taxes for any additional pay periods. And ensure you’re reporting the amounts accurately.
- Keep accurate records of any changes that might surface in a future audit, particularly payroll expenses and tax withholding.
- Review the leap year pay periods yourself to ensure you are aware of any discrepancies.
What about 2027?
Although Friday paydays might not be affected in 2024, in 2027 you will have 53 Fridays. So, plan for these eventualities to ensure accurate employee compensation.
Your takeaway?
Approach this situation with strategic planning and adjustments now and throughout the year to ensure you maintain compliance, avoid penalties, and keep employees informed.
If you need help with your payroll, please reach out to us.