Leap Year Payroll: The Ins and Outs, and the Math

Any business owner knows plenty of things that can stir up confusion throughout the year. One concern is every four years, businesses may have to work through leap year payroll.

Despite the name, leap year payroll refers to any year in which there is more than the usual number of pay periods. The name derives from the fact that there is more likely to be an extra pay period in a leap year because it has an extra day. If you don't have any salaried exempt employees who are paid weekly or biweekly, this won't cause your business any trouble. But if you do, and leap year payroll is not handled properly, it can cause problems for you and your employees. In this article, we will:

• Describe what leap year payroll is
• Outline the requirements for handling it
• Cover some best practices to help ensure accurate payroll calculations and compliance

What Is Leap Year Payroll?

A leap year occurs every four years when there is an additional day added in February from 28 to 29 days. This extra day can create an additional pay period for certain employees who are paid on a weekly or biweekly basis.

The problem arises because there are not exactly 52 weeks in a year, nor are there always exactly 26 pay periods each year. It's more like 52.1 and 26.1. In non-leap years, one day of the week occurs 53 times instead of 52 times. If your payday lands on that day of the week, you'll have an extra pay period. In a leap year, two days of the week occur 53 times, so there's a greater chance of your payday landing on one of those days and having an extra pay period.

2024 is a leap year, and there will be 53 Mondays and Tuesdays in the year. Salaried exempt employees who are paid weekly or biweekly on either of those days will have an additional pay period.

This phenomenon doesn't affect salaried exempt employees paid monthly or semi-monthly and nonexempt employees paid by the hour.

How to approach leap year payroll

To calculate leap year payroll, you’ve got a few options. One of the most popular business decisions is to not change things. Impacted employees will receive slightly higher salaries for the year due to the additional pay period.

For the salaried exempt employees in question, you would divide their annual salaries by the normal number of pay periods. Those employees would then receive that amount for the extra paycheck.

An alternative would be to take a salaried exempt employee's annual salary and divide it by 53 to determine the weekly pay for a leap year, or divide by 27 to determine biweekly pay. However, employees might see this as a cut in pay because each pay check will likely be smaller than in a non-leap year, even though their total annual salary will be the same, unless the matter is communicated clearly and well ahead of time so they can prepare for it. This method might hurt morale. There also could be limitations on choosing this option depending on the terms of employment in an employee's contract or offer letter.

Businesses that pay their salaried exempt employees monthly or semi-monthly where allowed by state law avoid this problem altogether. Payroll leap years occur infrequently; every five or six years for employees paid weekly and every 11 or 12 years for employees paid biweekly. Even so, a business owner might consider them when deciding what pay periods to use, among other factors such as state pay frequency requirements.

Outsourcing your human resources needs gives you access to payroll experts who can help you on preparing for and dealing with leap year payroll issues. Their software can help with adjustments necessitated by this problem.

HR Compliance Requirements for Leap Year Payroll

As with any payroll process, there are HR compliance requirements that you should consider when handling leap year payroll.

In the United States, the Fair Labor Standards Act (FLSA) establishes minimum wage, overtime pay, recordkeeping and youth employment standards for employers. While the FLSA does not specifically address leap year payroll, it does require that exempt employees be paid a weekly salary threshold, and state equivalent laws may establish a high salary threshold than the FLSA. Dividing an exempt employee’s annual salary by 53 or 27 as described above may potentially result in their weekly salary falling below the required federal or state exempt salary threshold. That would cause employees to lose their exemption status, which could result in wage and hour violations such as overtime and meal and rest breaks.

Additionally, the FLSA and similar state laws required all employees be paid for all hours worked, including an additional pay period that may occur in a payroll leap year.The main concern here is that an employer does not simply skip that extra pay period. That could run afoul of wage and hour laws. Employers must also accurately withhold and report payroll taxes for the additional pay period. The Internal Revenue Service (IRS) requires employers to withhold applicable federal, state and local withholding taxes, and Social Security and Medicare taxes for each pay period, including any additional pay periods in a payroll leap year. Failure to comply with tax withholding and reporting requirements can result in penalties and fines.

Best Practices for Handling Leap Year Payroll

To help with errors and accurate calculations, it's important to follow best practices for handling leap year payroll. Here are some tips for processing leap year payroll.

• Review your payroll system. Make sure that your payroll system can handle leap year payroll correctly. Make it an annual practice to review the upcoming year well in advance to look for an upcoming leap year. Review your payroll system's settings to make sure it accounts for the additional pay period, if applicable, and withholding taxes correctly. And when you are coming out of a payroll leap year, consider if you need to reset your payroll system to standard procedures. If you are unsure, check with your payroll provider or tax advisor.
• Communicate with your employees. Let your impacted employees know well ahead of time how you intend to handle any leap year payroll and how it will affect their pay. If you choose to keep payments the same, let them know that the extra payday is not an increase in their salary , but an additional pay period. If you instead choose to spread their annual salaries over the increased pay periods, explain to them why they may be paid less per paycheck. Tell them how this might impact their deductions for benefits and contributions to retirement plans and health savings accounts. Alert them to the possibility that these accounts might have annual contribution limits and they'll have to check their contributions.
• Prepare for the additional pay period. Plan for the additional pay period in your budget and cash flow. Make sure that you will have enough funds to cover the extra payroll expenses.
• Stay compliant with tax laws. Ensure that you are withholding and reporting payroll taxes correctly for the additional pay period. Consult with a tax advisor or HR professional if you have any questions or concerns about HR compliance.
• Keep accurate records. Maintain accurate records of payroll expenses and tax withholdings for the additional pay period. This can help you stay compliant and provide documentation in case of an audit.
• Review your pay dates. Double-check your pay dates so that impacted employees receive their paychecks on time. The additional pay period may require adjustments to your regular pay schedule, depending on how you plan to address leap year payroll.

Expert Guidance

Leap year payroll is the sort of thing that can drive a business owner to distraction. It's also the sort of thing that makes outsourcing HR functions so valuable. TriNet’s comprehensive HR services offer payroll experts who can help with these tricky things like leap year payroll easier to handle. Our experts can help you with the payroll process and the support to help you ensure compliance.