The case of the extra paycheck

Tax Law and News paycheck

It happens every 11 or 12 years — and 2020 is one of those years. Depending on which day of the week paychecks are handed out, employees who are paid on a weekly or biweekly basis may be receiving an extra check this month.

The 27th paycheck

With a biweekly payroll, an employee normally receives 26 paychecks each year. That cycle assumes there are 364 days in the year (26 x 14 days = 364 days). However, there are actually 365 days in a year, and 366 in a leap year. Those extra days eventually catch up with the pay cycle, resulting in an extra 27th payday in a single year.

For example, if an employee is paid on Wednesdays, the first payday of 2020 fell on Jan. 1, and the 26th payday will fall on Dec. 16 — with an extra 27th paycheck due on Dec. 30. Similarly, for an employee paid on Thursdays, the first payday was Jan. 2 and the final 27th payday will be Dec. 31. For Friday payrolls, 2020 will be a normal 26-payday year — but the 27th paycheck will show up in 2021, with the first paycheck due on Jan. 1 and the 27th on Dec. 31.

For hourly employees whose wages are calculated on a paycheck-by-paycheck basis, the 27th paycheck presents no problems, but for salaried workers whose annual pay is prorated over the number of paydays in the year, it’s a different story. According to numerous surveys, the majority of employers (more than 80 percent) take a pay-as-usual approach to the 27th paycheck. For example, if an employee’s annual salary is $52,000, his or her gross pay comes to $2,000 per paycheck in a normal 26-paycheck year. So with a pay-as-usual approach, the employee will receive an extra 27th paycheck based on $2,000 of gross pay.

On the other hand, employers — especially those who have not planned ahead — may be tempted to simply skip the 27th paycheck for salaried employees. However, that approach may run afoul of federal or state wage-hour laws, and it is not likely to sit well with employees who will have a four-week gap between paychecks at year end.

The 53rd paycheck

For weekly payrolls, there is a similar phenomenon, but it shows up more frequently every five or six years — and, again, 2020 is one of those years. For 2020, employees who are paid weekly on Wednesdays or Thursdays will have 53 weekly paydays instead of the normal 52. For Friday payrolls, there will be 53 paydays in 2021.

A 53rd weekly paycheck raises issues similar to the 27th paycheck for biweekly payrolls. But, that extra paycheck is not as likely to catch employers off guard since it is not as uncommon. Moreover, weekly payrolls are most typical in industries with hourly workers. By contrast, biweekly payrolls are the most common pay frequency for private employers, especially in industries with salaried employees.

Check those payroll deductions

Employees and employers should double-check to make sure that the extra paycheck doesn’t produce extra payroll deductions. For example, if an employee’s annual salary is at or near the Social Security wage base of $137,700 for 2020, a 27th or 53rd paycheck may push those earnings over the top. Therefore, the amount of employer and employee Social Security taxes on the final paycheck will need to be adjusted. The extra payday will also impact payroll deductions for benefits such as health coverage, retirement plan contributions, flexible spending accounts, and the like.

On the other hand, tax withholding can continue as usual. According to the IRS, “Adjustments aren’t required when there will be more than the usual number of pay periods, for example, 27 biweekly pay dates instead of 26” [IRS Publication 15, 2019 Employer’s Tax Guide (Circular E), p. 44].