Payroll timing: the extra pay period nobody budgets for

Biweekly payroll means 26 pay dates a year. Except when it means 27, which happens roughly every eleventh year because 26 fortnights is 364 days and the calendar is not.

And regardless of the year, two months in every year contain three pay dates rather than two. If your budget divides annual payroll by twelve, those months arrive 50% over plan — and payroll is usually the largest line in the business.

The three-payroll month

With payroll of $84,000 a fortnight, a normal month costs $168,000. A three-payroll month costs $252,000. That is an $84,000 variance nobody caused, on a date that was knowable a year in advance.

Which is right: 26 or 27?

Both, for different purposes, and confusing them is where the problem starts.

For cash, count actual pay dates. Put every one on the calendar and into the forecast on its real date. The money leaves when it leaves.

For expense, accrual accounting spreads it properly — wages are recognised as earned, so a month containing three payments does not report 50% more wage expense. If your P&L swings with pay dates, your payroll is being recorded on a cash basis and the monthly numbers are not comparable.

What to do about the 27th period

In a 27-period year, annual payroll cost genuinely rises by about 3.8% for salaried staff — you are paying 27 fortnights of salary in a year budgeted for 26. That is a real cost increase and it needs to be in the plan.

There are ways to handle it and they have consequences worth thinking about. Some businesses simply absorb it as an extra payroll, which is cleanest and most expensive. Some recalculate the per-period amount so annual salary stays constant, which reduces every paycheque slightly and is usually unpopular. Anything that changes what people receive per period deserves a conversation with a payroll adviser and clear communication, well in advance.

Put every pay date on the forecast

This is the fix, and it is almost trivially simple. Payroll dates for the next twelve months are knowable today. Put them all on the 13-week cash flow as actual dated outflows rather than a monthly average.

The three-payroll month then stops being a surprise and becomes a constraint you plan around — and the collisions become visible too. A three-payroll month that also contains a quarterly tax payment and an annual insurance renewal is precisely the week a comfortable business ends up drawing on a line of credit, and none of the three components was unexpected on its own.