Leapin’ Lizards! What Payroll Needs to Know About Leap Year

The modern 12-month, 365-day calendar was invented (or standardized) in 1582, by Pope Gregory XIII, which makes sense when you think about it. Back then, there was nothing resembling a “payroll” of any kind.

Who really cared if every four years there was an extra day in February? And let’s face it, putting Leap Day in February shows a real lack of imagination, since if there has to be an extra day every four years, why not put it in the summer?

Leap year did not matter to 16th Century Europeans, but it does matter to 21st Century payroll departments. Why: The extra day may impact the number of payroll runs during that year. And, in fact, leap year aside, employers that use biweekly pay periods will experience an extra pay period every 11 or 12 years (five or six years for employers that pay weekly).

The IRS does not acknowledge the 27th or 53rd pay period; its withholding tables are built around the standard 26- or 52-week pay cycle. Employers, on the other hand, must plan for this extra pay period well in advance, since corporate budgeting and tax liabilities are involved.

Manage the Extra Pay Period

An employer has four choices, but none are risk-free.

  1. Ignore the extra pay period and continue to pay on a biweekly (or weekly) basis (i.e., continue to have 27 or 53 pay periods). Essentially, employers are taking the IRS’s approach.

Reward: Employees will receive an extra pay period’s worth of pay.

Risk: Employers will take on a considerable cost in reprograming their payroll systems to account for the extra pay period and then reprograming them again the next year.

  1. Divide employees’ annual salaries by the number of actual pay periods (i.e., 27 or 53).

Reward: Reprogramming payroll systems becomes unnecessary, in that employers have steady payrolls, regardless of the number of pay periods.

Risk: Morale will nosedive, as employees are fine tuned to their net pay and will notice the difference. This does not matter much for non-exempt employees, since they are only paid for their actual working time. It matters for exempt employees though, especially those making close to the weekly cut-off of $684.

  1. Divide employees’ annual salaries by the appropriate calendar year divisor: 26.0893 for biweekly pay periods or 52.1786 for weekly pay periods. The risks and rewards of this option closely mirror those for the second option.
  1. Switch to a semimonthly pay period. The extra pay period does not affect employers that use a semimonthly pay schedule; employees are paid 24 times a year.

Risk: Figuring out the workweek equivalent for non-exempt employees who work overtime.

Most employers take the first option, even though it can be costly. In addition to programming costs, employers must fund wages and deal with the taxes for the extra pay period.

Account for Payroll Taxes

It is not efficient for the IRS to account for extra pay periods, because a 27th or 53rd payroll can arise in any year, depending on employers’ paydays. The IRS releases its withholding tables in December and expects employers to make the adjustment. There are two options:

  • Continue using payroll software based on 26 biweekly pay periods, with the extra pay period added in. Risks: Employees will probably be under withheld and employers may be liable for tax penalties; or
  • Reprogram payroll software for the 27th or 53rd pay period.

Account for Benefits

Some benefits, such as pretax contributions to 401(k) plans or qualified transportation fringe benefits, have annual or monthly caps. Similarly, employees often accrue benefits, such as vacation leave and sick leave.

The extra pay period impacts these benefits and accruals. Employers get a break here, since most make the same decision for employee benefit accruals and elections.

Depending on your pay date, the other bit of good news is that you will not have to worry about this vexing Leap year issue again until 2024.