Friday, January 1, 2021, is a payday for many companies, and we’re getting questions about whether employers should pay on December 31, 2020, or January 4, 2021. In the long run, it is a business decision. Here are a few considerations.
First and most important, understand state payday laws. Many states have laws that employees must be paid within a specific number of days after the pay period ends.
Paying on December 31, 2020, will cause an extra paycheck in 2020, which could affect benefit premiums, 401k contributions (mainly if an employee has set up their contribution to meet the maximums), any automatic payments employees have, and any other banking or benefits issues. It will also affect the company’s budget for the year. It will also cause one less paycheck in 2021, affecting all of the above in the other direction. Finally, any wages paid in the calendar year would need to be reported on employees’ form W-4 for that year, so the extra paycheck could affect your employees’ personal income taxes. Employers should never give tax advice, so you will want to inform your employees they should talk to a tax expert as to how that will affect them.
Paying on January 4, 2021, will also affect employees’ automatic payments and other banking arrangements. It could also make for late rent or mortgage payments.
From a budget standpoint, if you decide to pay employees in December 2020, know that under the Fair Labor Standards Act, hourly employees must be paid each payday at their hourly rate for all hours worked, so there can be no adjustments. For exempt employees, if you have offer letters that quote a weekly or bi-weekly rate for salaried employees, it is not recommended you change salaried employees’ pay. Another way of looking at this is that, even though you’re issuing the employee one extra paycheck, the amount of work is the same.
While this anomaly will not be a permanent change to anyone’s payroll cycle, this Changing a Payroll Cycle Checklist can help you think through some of the one-time issues as well.