How to Handle Extra Pay Periods Caused by the Calendar

Author: Alice Gilman

A calendar year and an employer's pay periods do not always coincide precisely. Approximately every 11 years, an employer that pays employees on a biweekly basis will have an extra pay period. An employer that pays employees on a weekly basis will have an extra pay period every five or six years. The exact year in which an extra pay period falls depends on the day the employer designates as the payday.

An employer must resolve three separate questions regarding the extra pay period:

  • How will it impact exempt employees' pay?
  • How will it affect income tax withholding for all employees?
  • How will it affect employees' benefits?

Regardless of how an employer deals with the extra pay period, decisions must be made far in advance, since corporate budgeting and tax liabilities are involved.

Step 1: Verify Whether There Is an Extra Pay Period During the Year

An employer should map out the paydays on a wall calendar prior to the beginning of the next year. Special consideration should be given to holidays that fall on Fridays or Mondays, because it is customary to pay employees on the day before a holiday.

Practical Example

Acme Corporation pays its employees biweekly every Friday. Meg Leary, Acme's Payroll Manager, is determining the pay dates for the coming year. One pay date falls on a Friday holiday, so Acme will pay its employees on the preceding Thursday. Looking at the calendar, Leary determines that there are 53 Thursdays in the coming year. Acme must deal with a 27th biweekly pay period.

Step 2: Choose a Method of Managing Extra Pay Periods

An extra pay period is not a bonus pay period; it affects both exempt and salaried, nonexempt employees' pay. An employer cannot simply decide to not pay for the 27th pay period, since an employer that fails to pay an employee may be penalized under a state's wage payment law. An extra pay period does not affect hourly, nonexempt employees' pay, since such employees must be paid for every hour worked. The extra pay period does affect all employees' benefit deductions that are determined on an annual or pay period basis.

An employer has three choices, but each comes with risks and rewards:

  • Ignore the extra pay period and continue to pay on a biweekly (or weekly) basis (i.e., to have 27 or 53 pay periods);
  • Divide employees' annual salaries by 27 (or 53), instead of 26 (or 52); or
  • Divide employees' annual salaries by the appropriate calendar year divisor: 26.0893 for biweekly pay periods or 52.1786 for weekly pay periods.

An employer that chooses to ignore the extra pay period must adjust its payroll program to accommodate the 27th (or 53rd) pay period and budget for the additional pay.

An employer that reduces exempt employees' pay must ensure that the reduction does not violate an employment contract or leave the employees with pay of less than $455 a week - the minimum salary for most overtime exemptions under the Fair Labor Standards Act.

An employer that uses the appropriate calendar year divisor does not need to adjust its payroll program to account for the additional pay period. However, employees will not receive the same amount of annual pay from year to year.

Practical Example

Acme is determining its choices for Mary Padgett, the HR Manager. She earns $104,000 annually, which is $4,000 for every biweekly pay period.

  • If Acme decides to do nothing and honor the 27th pay period, Padgett would continue to earn $4,000 per biweekly pay period, but her annual salary would increase to $108,000.
  • If Acme divides Padgett's pay by 27, rather than 26, pay periods, Padgett's biweekly pay would decrease to $3,851.85 ($4,000 × 26 = $104,000 ÷ 27) and her annual pay would decrease to $103,999.95.
  • If Acme uses the appropriate calendar year divisor, Padgett would earn $104,357.20 annually ($4,000 × 26.0893), $4,013.74 biweekly in calendar years without a 27th pay period ($104,357.20 × 26.0893 ÷ 26), and $3,865.08 biweekly in calendar years in which there is a 27th pay period ($104,357.20 × 26.0893 ÷ 27).

Step 3: Calculate the Payroll Tax Liability

The 27th pay period exists quite apart from an employer deciding how to handle an exempt employee's pay for that extra pay period. All employees, except those who claim exempt status on Form W-4, Withholding Allowance Certificate, are subject to federal income tax withholding and withholding for Social Security and Medicare taxes. An employer also pays a matching share of Social Security and Medicare taxes.

The IRS does not adjust its income tax withholding methods to account for the taxes due for an extra pay period. An employer, therefore, must make its own payroll software adjustments. An employer has two choices:

  • Continue to use a software formula based on 26 biweekly pay periods, with the extra pay period added in. However this could result in income taxes being underwithheld from employees' pay; or
  • Compute employees' biweekly pay based on 27 biweekly pay periods. An employer that chooses this method must ensure that it readjusts its software formula to 26 biweekly pay periods for the next calendar year.

Practical Example

Acme is determining its income tax withholding choices for Padgett's pay. Padgett is unmarried and claims two withholding allowances on her Form W-4.

If Acme continues to use a software formula based on 26 biweekly pay periods, Padgett's biweekly income tax withholding for 2015 will be $742.69, based on the following calculation:

  • Annualize Padgett's pay: $4,000 × 26 = $104,000.
  • Determine her taxable pay: $104,000 - $8,000 ($4,000 × 2) = $96,000.
  • Annual income tax withholding on $96,000: $96,000 - $93,050 = $2,950 × 28% = $826 + $18,481.25 = $19,307.25.
  • Determine income tax withholding for biweekly pay period: $19,307.25 ÷ 26 = $742.58.
  • Add in income tax withholding for the 27th pay period: $742.69.

The total annual withholding is $20,049.94 ($19,307.25 + $742.69).

If Acme uses 27 biweekly pay periods, Padgett's annual salary increases to $108,000. The amount to be withheld every biweekly pay period is $756.56, which is calculated as follows:

  • Annualize Padgett's pay: $4,000 × 27 = $108,000.
  • Determine taxable pay: $108,000 - $8,000 ($4,000 × 2) = $100,000.
  • Annual income tax withholding on $100,000: $100,000 - $93,050 = $6,950 × 28% = $1,946 + $18,481.25 = $20,427.25.
  • Determine income tax withholding for biweekly pay period: $20,427.25 ÷ 27 = $756.56.

The total annual withholding is $20,427.25. The difference between the two annual withholding amounts - $377.31 - is the amount by which Padgett may be underwithheld for the year. 

Step 4: Assess the Impact on Annual Benefit Elections

Some popular employee benefits are capped at annual maximums, including the following:

  • Employees' pretax contributions to health flexible spending accounts;
  • Employees' pretax contributions to retirement plans, such as a § 401(k) plan;
  • Employees' pretax catch-up contributions to retirement plans, such as a § 401(k) plan;
  • Employees' and employers' contributions for dependent care assistance benefits;
  • Employees' pretax contributions for qualified transportation fringe benefits;
  • Employees' group-term life insurance; and
  • Group-term life insurance for employees' dependents.

Similar to income tax withholding, the IRS does not adjust the annual caps to account for the 27th pay period. Therefore, regardless of whether an employee is exempt or nonexempt, an employer has two choices when dealing with an employee's annual benefit elections:

  • Divide the value of the employee's annual benefits by 27 to keep the deductions constant for the year (and change the formula back the next year); or
  • Continue to use a schedule of 26 pay periods, but suppress the deductions for the extra check.

Step 5: Choose a Method of Accounting For Benefit Accruals

An employer may provide an employee with benefits that accrue on a pay-period basis, such as sick leave, vacation leave or personal time off. The extra pay period will impact accruals for these benefits. Similar to an employee's annual benefits elections, an employer has two choices to account for the accruals that are attributable to the extra pay period:

  • Divide the value of the employee's annual benefits by 27 to keep the deductions constant for the year (and change the formula back the next year); or
  • Continue to use a schedule of 26 pay periods, but suppress the deductions for the extra check.

An employer usually makes the same decision for employee benefit accruals and elections.

Additional Resources

Payment of Wages

Withholding Taxes

Taxation of Employee Benefits

Taxation of Employee Compensation

Determine Federal Income and Employment Tax Withholding

Pay Frequency and Lag Time Requirements by State