Changing Pay Frequencies Affects Taxes, Requires Communication

Employers changing their frequency of pay must consider more than simply how often they are going to pay employees, two payroll experts said July 10.

There are four main types of pay frequencies in the United States: weekly, biweekly, semimonthly, and monthly, said Gerard Hall, CPP, director of payroll operations at CBIZ. Hall is a member of Bloomberg Tax’s payroll advisory board.

The federal Fair Labor Standards Act does not regulate pay frequencies, but states do, he said. In most cases, state laws establish minimum pay frequency requirements by limiting lag time, which is the length of time from the last day of a pay period to the date of payment for that pay period.

Employers may want to change their pay frequencies to ensure compliance with relevant state laws, but other motivations might include improving operations or increasing employee satisfaction, said Lori Carter, CPP, director of payroll and human capital at Guidehouse. However, employers may not continually change pay frequencies or try changing a pay frequency to avoid paying overtime, she said.

Carter and Hall spoke at PayrollOrg’s Virtual Congress.

Transitioning from one pay frequency to another can pose some technical challenges, said Hall. In some instances, an interim period between the end of the old frequency and the start of the new frequency may be needed, which could affect tax withholding calculations for employees during that period. Employee pay might also need to be updated.

“When adjusting pay frequencies, especially when it comes to salaried employees, you might have to adjust salaries. The salary pay will need to reflect the new frequency,” he added. “Hourly employees usually do not need any adjustments because they are still being paid by the hour. We’re just going to count a different pay period and pay the hours accordingly.”

Hall recommended that employers contact employees to ask if they want to fill out a new Form W-4, Employee’s Withholding Certificate, to adjust their additional withholding. Additional withholding is based on an employee’s pay period, which would change as the pay frequency is adjusted.

However, employers should never offer tax advice to employees, he warned. “The one thing to always make sure you consider, no matter how important you want to educate people, you never want to get into a place where you are giving tax advice,” he said. “You will set yourself and your company up for potential losses and penalties.”

Employers have their own tax considerations, such as ensuring that they are using the appropriate tax withholding tables for the new pay frequency, he said.

Carter suggested that employers test their systems before implementing a new pay frequency. “Test the pay statements, make sure the deductions have been changed, that the taxes are withheld correctly, that you phase out prior employee documentation, and that [current documentation] is available,” she said.

Failure to properly test before implementation can result in future problems, Carter said, speaking from experience. After transferring employee data during an acquisition, she said, her team failed to change the acquired employees’ pay frequency in the payroll system. As a result, those employees were overtaxed on their first paycheck after the change was made.

Employees can be adverse to changes related to their pay, and employers should develop a communication plan to inform and educate them, she said. She recommends that employees be informed as soon as possible, ideally at least 90 days in advance. Employers should also beware of any state laws that require notifying employees in advance of pay frequency changes.

Companies might also want to hold office hours or question-and-answer sessions for employees, Carter added. In all cases, employers should show empathy during the process because the change might be difficult for employees to accept or understand.

“They are our customers. They are the entire we reason that we do what we do,” she said.