“Never test the depth of the water with both feet.”
- Warren Buffett
One of the more common calls we get at this time of year, and one on which I’ve written before, has to do with payroll periods.
Most companies pay their employees every two weeks, or twice monthly. That means that they set the payroll in their Sage 50 Canadian to either 26 pay periods, for biweekly pay, or 24 pay periods, for semi-monthly pay.
Around late November or early December, we get requests from callers asking about the unusual pay period; either a 27th pay because of the way the week falls on a particular year, or an extra paycheque because of a bonus payment, or something else similar.
There seems to be confusion about what happens when a 27th paycheque is generated if a company is set for 26 pay periods, or a 25th cheque when set for 24 periods, etc.
In brief, our software (and indeed, many others as well) use a ‘cyclic’ method for calculating deductions.
Let’s say that the system is set for 26 pay periods per year, and an employee receives a gross pay of $2,000 every two weeks. The Sage program will then calculate that the employee receives $52,000 per year, and calculate deductions accordingly.
If the employee received income that changed from period to period- an hourly or piece work employee, for instance- the system would take each paycheque on its own and calculate taxes as though every paycheque was like that paycheque.
In other words, if our employee worked only a few hours one period, and only earned $200 in two weeks, the system would assume he got 26 cheques exactly like that one and calculate his deductions based on earning $5,200 per year.
If he then worked lots of overtime in the following two weeks, and earned $4,000 in that period, the system would assume that he earned $4,000 in EVERY two week period, and calculate his deductions based on an annual income of $104,000.
Usually, payroll variations are not that extreme, and will average out over the year. One way to check the status of deductions is to do a PIER report.
Go to Reports- Payroll- Year-end Review (PIER) and run the report. It will give details of total taxes, EI, and CPP paid, and whether you have over- or under-deducted your employees.
Running this report in late November or early December usually leaves enough pay periods in the year to make adjustments to the final paycheques, and avoid having to make large adjustments at year end.
Fun math trivia: It’s called “The Monty Hall Problem” in mathematics. You are on a game show with three ‘mystery doors’. Behind one door is a brand new car, behind the other two are gag gifts- a goat or a donkey. You pick one of the three doors, and the show host opens one of the remaining two doors. It has the goat behind it. You’re asked if you want to stay with the original choice or choose the other door. You now have a 50% chance of getting the car. Do you stay with the door you chose before, or change your pick to the third door?
The answer is surprising. If you change your decision, you will win about half the time. If you stay with your original decision, you only win about one third of the time. The explanation is simple, but counter-intuitive. If you stick with your original decision, you’ve chosen one door in three. No matter what the host shows you behind the first door, you’re committed to a one in three decision.
If, on the other hand, you take a step back after the first door was opened, you have a one in two chance of being right. Deciding on a different door now increases your odds. Strange, but true.
