What is vacation pay?

Vacation pay, or paid time off (PTO), is an employee benefit that employers provide their staff members. Employees can take a day off that they’d typically be working while still receiving their regular wages. This allows employees to take vacations or mental health days without worrying about loss of wages.

Companies that offer vacation pay may experience increased employee morale and loyalty. This is because workers feel their employer cares about their health and well-being outside the office. Plus, taking breaks longer than weekends throughout the year without fear of negative financial implications can be great for employees’ mental health.

What is accrued vacation pay?

Accrued vacation pay is a standard method where an employee earns a certain number of hours or days in vacation pay throughout a year or during their employment with a company. For example, after one year at a company, an employee might receive 10 paid vacation days. After five years, they’d accrue 15 paid vacation days and at 10 years, they’d receive 20 paid vacation days.

How to calculate vacation pay for your employees

The calculation of PTO varies from one company to another based on their vacation pay policy and specifications. There are six steps you can take to calculate vacation hours for your employees, which we discuss in depth below.

1. Review the employment types you offer

Your company may offer only one employment type, or it may offer a few different ones. Common employment types include:

• Salaried: Employees are paid a flat rate per week, month or pay period, regardless of how many hours they work.
• Full-time hourly: Employees are paid an hourly wage and work more than 32 hours weekly.
• Part-time hourly: Employees are paid a set rate for each hour but work less than 32 hours weekly.
• Seasonal: Employees only work for part of the year, either salaried or hourly.

Understanding the employment types your company offers can help determine the PTO calculation type that will work best. If your company offers more than one of the employment types listed above, you’ll have to use a different calculation method for each one.

2. Choose a yearly vacation pay schedule

One option for vacation pay is to assign employees a set number of paid vacation days annually. You can use this for any employee type, but it generally works best for those who are salaried. There are different ways you can choose to assign annual PTO days.

One option is to base the number of vacation days on the years spent with your company. For example, you could start by giving employees three PTO days in their first year, then increase by one or two days each year moving forward.

Another option is to base annual vacation days on pay grade or level within the company. For example, you could assign three PTO days for entry-level employees and continue increasing the days up to the executive team, which receives 10 annual vacation days.

Of course, you should choose the annual vacation days schedule based on what works best for your company. The best choice may be either of the options in the examples above or something else entirely.

3. Calculate vacation pay based on hourly work

Basing vacation pay on hourly work is a viable option for any hourly worker, and it can be especially useful for part-time employees. Below is an overview of the calculation you can use for determining vacation pay based on hourly work:

• X(hours weekly) x 52 weeks (total weeks in a year) =X(yearly hours worked)
• X(yearly hours worked) –X(standard hours of PTO per year) =X(yearly hours worked after PTO)
• X(yearly hours worked after PTO) –X(standard hours of PTO per year) =X(yearly hours worked)
• X(hours weekly) /X(yearly hours worked) = X(accrual of PTO per hours worked)

Example:

Here is an example of an employee who works an average of 40 hours a week:

• 40 (hours weekly) x 52 weeks (total weeks in a year) = 2,080 (yearly hours worked)
• 2,080 (yearly hours worked) – 50 (standard hours of PTO per year) = 2,030 (yearly hours worked after PTO)
• 2,030 (yearly hours worked after PTO) – 50 (standard hours of PTO per year) =1,980 (yearly hours worked)
• 40 (hours weekly)/ 1,980 (yearly hours worked)= 0.02 (accrual of PTO per hours worked)

In conclusion, for every hour worked, your employees get 2% of those hours added to their vacation time.

4. Calculate vacation pay based on daily hours worked

This method is typically used for part-time employees who work 8-hour shifts. However, you can also use it for full-time hourly or salaried workers if they generally work typical 8-hour shifts.

First, you need to note the number of paid holidays you offer. Here is an example of an employee who works 2 full days a week and gets six paid holidays:

• 2 (days) x 52 (weeks) = 104 (workdays annually)
• 104 (workdays annually) – 6 (paid holidays) = 98 (workdays annually)
• 2 (days) / 98 (workdays annually) = .02 = 2%

5. Calculate vacation pay based on monthly or biweekly pay periods

This method is helpful for full-time or salaried employees. To perform this calculation, you need to know how many hours of vacation time you offer and the number of pay periods your employees receive. Here is an example for an employee paid biweekly:

50 (vacation hours) / 26 (pay periods) = 1.92 (accrued hours each pay period)

6. Create a PTO calculator

Using a spreadsheet program, you can create your own vacation hours calculator for your employees. This isn’t a mandatory step, but it can be helpful to organize and track your employees’ vacation pay.

Creating your PTO calculator will vary based on the program used. But, you should be able to insert the information from above into the calculator so each person’s PTO accumulates automatically instead of manually doing it.

Employees value good benefits packages, and vacation days (or PTO) are crucial to any benefits program. Once you determine the right way to assign vacation days and the formula you want to use, you can develop a PTO calculator to streamline the process.

Frequently asked questions about calculating PTO

Does vacation pay or PTO roll over?

That depends on your company policy. Some companies allow employees to roll over all their PTO at the end of the year, while some only allow a certain amount to be carried over into the next year. Other companies don’t allow rollover, meaning employees must use their PTO within a calendar year or lose it.

Do employees continue to accrue vacation time while on vacation?

That depends on the way PTO is assigned. If vacation time is given per day, week, pay period or year, an employee will continue to accrue their vacation time while on vacation. If employees earn PTO based on hours worked, they may not continue accruing vacation time while taking time off.

What’s the average annual PTO or vacation time employees receive?

According to the Bureau of Labor Statistics, the average annual PTO received by employees varies significantly based on how long they’ve been with a company. Most employees are given 5 to 14 days of PTO in their first year with a company. Conversely, employees who have remained with a company for 20 or more years accrue an average of 20 or more vacation days each year.

Does PTO get taxed differently?

No. Paid time off or vacation time is taxed the same as regular hours worked. This means payments made for PTO are subject to regular withholding.