Annual Salary Doesn't Match Total of Bi-Weekly Payroll

[ptownbro]

I've always taken for granted that the bi-weekly payroll calculation works until I was faced with a question from an employee I could not answer. Best explained with an example, so assume the following basic example for the year 2019 to illustrate:

You have an employee that earns a salary of $26,000 per year. That employee was hired on 1/1/19 and terminated on 12/31/19. So, in theory they should receive exactly $26,000 as payment.

The pay schedule for the company is bi-weekly, where they are paid each Friday for the previous 2 weeks. And, the first pay date for the year is 1/4/19.

For some reason, I cannot get the sum of all the bi-weekly payments to match $26,000. In other words, they don't end up getting paid $26,000. By my calculations they get paid $26,100. An extra $100.

Here's the calculation: First, note that with a bi-weekly payroll, they should expect to get paid $1,000 per week

1. Pay period 01/04/19 is for work during 12/16/18 to 12/29/18. So they don't get anything that week.
2. Pay period 01/18/19 is for work during 12/30/18 to 01/12/19. Here they only worked 9 of the 10 days, so the payroll was prorated to $900
3. The next 25 pay periods from 02/01/19 to 01/03/20 cover everything from 01/13/19 to 12/28/19. And, they get the full amount of $1,000 per week
4. Pay period 01/17/20 is for work during 12/29/19 to 01/11/20. Here they only worked 2 of the 10 days, so the payroll was prorated to $200
5. Given the above the sum of the bi-weekly amounts equal $900 + ($1,000 X 25) + $200 = $26,100

Why doesn't their annual salary doesn't match the sum total of the relevant bi-weekly payments for that year?

 

[kirby]

Stuff like this can drive you nuts.

But go back to the basics - the deal was to pay biweekly. So there are 26 pay periods in a 52 week year. So far so good.
Now each pay period consists of 14 days. So 26 pay periods times 14 days = 364. Hmm. a year has at least 365 days. So very quick and dirty that's a reason right there. The artifice of a 26 pay period system doesn't match with the reality of the calendar.
For this reason, it is more accurate for a company to say "we'll pay you $1,000 every 2 weeks." instead of saying "$26,000 a year."

If others on the forum have another method of explanation for the issue - please weigh in.

And anyway ptownbro - don't sweat the small stuff. As long as an employee gets at least the $26,000, which they did here, you're OK.
If less, ....not so much.

 

[Werner Reisacher]

Just my five cents, for whatever it's worth.
In the US, public companies' performances are measured on their quarterly results. In order to have comparable time periods, all quarters are divided into 4 +4 + 5 week periods. (13 weeks per quarter x 4 - 52) The day of the payroll cut off for the bi-weekly paychecks is not identical to the calendar days of the months. Depending on the time you start of quit your job, your first bi-weekly check or the last check you will receive might therefore only cover a few days. Combined, you should get paid for every single day you worked. In the case of Sales staff that receive commission payments, the traditional batch processing Cobol mainframe systems calculate the commission payments only once a week, and salespeople will get their last commission payments one or two weeks after they left employment.

 

[Kat Maple]

The last sentence of the post above gives incorrect information and I thought it would serve the Forum folks if that was cleared up.
The deadline to pay the last paycheck is set by each state's employment law, it it further depends on whether the employee resigned or terminated, For example: in California if an employee quits then the last paycheck must be given to them within 72 hours or immediately if the employee gave at least 72 hours notice. Also for California, if the employee is terminated the last check must be given to them immediately.

Hope this helps set things straight!

Kat

 

[Werner Reisacher]

Almost Kat - I really appreciate your input. The more I learn the more I realize how little I remember about the practical applications in the real world.
Would appreciate some feedback from somebody who is working in the 13-week accounting cycle environment. After I posted my comments about payroll cut off above, I started to realize, that there is a conflict between the payroll point of view and the fact that during all the years I was working in a factory that belonged to a public company, December 31st was the busiest shipping day in the entire year. Never left before midnight. Unless products were loaded on a truck and left the gate, the sale was not recognized in the current year. Sales cut off on December 31st at midnight was an iron-cast rule. The goods had to be "out of the gate" by midnights. Trucks were lined up around the block and the entire factory crew was loading. And "officially" no - they did not go to a rented warehouse. How did we reconcile that timing difference? Were there two weeks of sales with less than 5 days?

 

[Kat Maple]

Thank you, Werner! I'm glad that you've learned from my post how the timing of termination payments are mandated by the state and not "one or two weeks after they left employment" as you had written. Learning is a good thing!

Stay healthy!

Kat