Good morning, Ladies and Gentlemen. Welcome to the People Processes podcast, where we dive deep into the tools, laws, and yes processes that you need to know in order to scale and grow your organization. We help companies all across the United States streamline, optimize, implement, and revolutionize their HR operations. We’ve helped hundreds of companies and thousands of HR leaders across the world get their people processes right.
Today we’re going to talk about the strange case of the 27th paycheck here in 2020. Before we go too deep though, I want to ask you to please subscribe to our podcast. You can find us on iTunes, Google podcasts, Spotify, Stitcher, any podcatcher of your choice. You can also subscribe @peopleprocesses.com which will give you some exclusive subscriber only content.
All right, let’s dive in. It happens every 11 or 12 years —and 2020 possibly 2021 is one of those years. Depending on your payday, if you pay employees on a biweekly basis, you might be cutting an extra paycheck this year. The 27th paycheck of a 26 pay periods cycle with a biweekly payroll, you normally process 26 paychecks each year. That cycle assumes there are 364 days in the year (26 x 14 days = 364 days). However, as you know, there are actually 365 days in a year and 366 in Olympia. Those extra days eventually catch up with your pay cycle, resulting in an extra 27th pay day in a single year.
For example, if you pay your employees on Wednesday, your first payday of January 2020 fell on January 1 and your 26th pay date will fall on December 16 —with an extra 27th paycheck due on December 30, suppose. Similarly, if you pay on Thursday, that’s January 2 and the final 27th payroll will be December 31. And then for many, many, many of you you pay on Friday. For you, it’s going to be a normal 26 payday year —but that 27th paycheck is going to show up in 2021, with the first paycheck due January 1 and the 27th on December 31.
For hourly workers whose wages are calculated on a paycheck-by-paycheck basis. This is no problem. The 27th paycheck doesn’t mean anything for salaried workers whose annual pay is prorated over the number of paydays in a year, it’s a different story. According to numerous surveys, the majority of employers, something like 80% take a pay as usual approach to the set 27th paycheck. For example, if an employee’s annual salary is $52 grand, his or her gross income or gross pay comes to $2000 bucks per paycheck in that normal 26-paycheck year. So, with the pay-as-usual approach, the employee is going to get an extra 27th paycheck with an extra $2000 bucks of gross pay.
So that’s kind of cool. You’re gonna wind up paying $54,000 for that person. On the other hand, you (or your payroll software) may have already recalculated the employee’s per-paycheck amount to be based on 27 paydays for the rest of the year. So, for an example, an employee earning $52,000 will receive 27 paychecks based on $1,926 approximately of gross pay instead of $2000, kind of depends on what kind of system you’re using. Employers —especially those who have not planned ahead—may be tempted to simply skip the 27th paycheck per salaried employee. That’s not legal. It’s going to almost always run afoul of federal or at least state wage-hour laws—and it’s probably not going to make your employees too happy. We’ll have a four week gap between their paychecks right after Christmas, wouldn’t recommend that.
Whatever approach you take, that’s okay, but you need to communicate with your employees. If you choose a pay-as-usual approach, employees should be alerted that the extra paycheck is a one-shot deal and that their annual wages will revert to normal levels the following year. If paychecks are prorated over 27 weeks, the drop in their biweekly pay should be carefully explained to your salaried employees. Also, this is important too. Check the payroll deductions. The extra payday will also impact payroll deductions for benefits like health coverage, retirement plan contributions, and flexible spending accounts. If you pay as usual—and deduct as usual—for that 27th paycheck, you would be over withholding for the year for things like major medical. If you prorate annual compensation over 27 paychecks, you’re going to need to recalculate the per paycheck benefit deductions as well.
This gets way complicated guys. That’s why we strongly recommend for those of you on a biweekly payroll that you withhold 24 times a year, you always block that third payroll in a month. That’s how we do it. But there are many other people who don’t. That’s totally fine, but you’ve got to think about this stuff. You won’t get in trouble for paying too much. You will get in trouble. Real trouble for over withholding funds to pay for health insurance your employees don’t have. So you got to focus on this.
By the way, this is also a problem for weekly payrolls. It’s similar anyway. It shows up more frequently every five or six years—and 2020 is one of those years. For 2020, employees who pay weekly on Wednesdays or Thursdays are going to have 53 weekly paydays instead of the normal 52. For Friday payrolls, there will be 53 paydays next year, 2021. A 53rd weekly paycheck raises the same issues to the 27th paycheck for biweekly payrolls. But that extra paycheck is not as likely to catch the employers off guard since it’s not as uncommon. Still, weekly payroll is most typical in industries with hourly workers. So also if they’re hourly, no stress, but by weekly is the most common pay frequency for private employers, especially in industry with salaried employees.
So that’s the one we focused on here today. Your biweeklies, it’s a similar math though. You’ve got to think about the fact that if you do have people salaried paid weekly, you’re going to have some rough calculations you gotta figure out. You gotta decide whether you’re gonna prorate all year. You gotta decide whether you’re going to just pay extra and he got to look at your deductions. Again, weekly can be solved the same way. Block the fifth payroll of each month so that all of your deductions, there’s only 48 deductions a year versus 52, gives you a much more even set up for payroll deductions each month.
Contact us if you have any more questions. We’d love to help you explore how to better structure your payroll deductions to make this less of an issue. Then you don’t have to worry about your earnings. Okay, Ladies and Gentlemen, that is it for today. Just a quick deep dive into this weird calendar year, once a decade kind of occurrence. If you pay on Fridays, next year is your problem. Think about it before that, if you pay any other day of the week, Wednesday, Thursday, you’re going to wind up owing the money. You’re going to wind up with an extra payroll this year, biweekly or weekly. Thank you so much for tuning in. My name is Rhamy Alejeal, I’m the CEO of People Processes, and I appreciate your time now check us out at peopleprocesses.com. Go out there, get your work done and have a great day.