What is vacation pay?

Vacation pay is the wages you pay employees when they take approved time off for rest, travel, or personal reasons. Unlike unpaid leave, vacation pay ensures employees continue earning their regular income while away from work. Depending on your policy, vacation pay may be offered separately or as part of a broader PTO bank that also covers sick days and personal time.

What is accrued pay?

Accrued pay refers to the compensation an employee has earned but not yet received. In the context of vacation pay, it usually means the PTO hours that have been accrued through work but haven’t been taken or paid out yet. For example, if your employee earns four vacation hours every pay period, after three pay periods they’ve accrued 12 hours of vacation pay, even if they haven’t used it.

For you as an employer, tracking accrued pay is essential for payroll accuracy and compliance. PTO calculators help ensure that employees are credited for time earned and calculate accrual balances for payouts when someone leaves the company.

How does a PTO calculator apply to vacation pay?

A PTO calculator helps translate your vacation pay policy into clear, trackable numbers. For example, if you offer two weeks of vacation each year, the calculator breaks that down into hours per pay period or per hour worked to simplify how vacation pay accrues whether they’re salaried or hourly.

PTO calculators can also ensure consistency by potentially reducing confusion, keeping payroll accurate and giving employees confidence that their vacation pay is being tracked fairly.

Why accurate vacation pay calculations matter

When your calculations are consistent and transparent:

• Employees might feel confident about using their vacation time.
• You could reduce HR and payroll questions about balances.
• Productivity may improve since employees can plan time off without confusion.

By pairing a PTO calculator with clear policy rules, you set expectations and show employees that vacation pay is a reliable part of your benefits package.

Common vacation pay accrual methods 

1) Annual grant (lump sum)

Employees receive their full PTO bank at the start of the plan year or on their anniversary date.

• Best for: Simple communication and easy tracking.
• Considerations: New hires may need pro-rated time; employees could use all PTO early.

2) Per pay period accrual

You divide annual PTO into equal amounts each pay period.

• Best for: Salaried employees on consistent schedules.
• Considerations: Requires rounding rules and consistency across pay periods.

3) Hours-worked accrual

Employees earn PTO based on hours worked (e.g., 0.058 hours per hour worked for ~120 hours per year).

• Best for: Hourly, part-time, or variable schedules.
• Considerations: Decide if non-worked hours (holidays, training) count toward accrual.

4) Tenure-based accrual

PTO increases with years of service.

• Best for: Retention and rewarding loyalty.
• Considerations: Define when tiers take effect and how to pro-rate mid-year changes.

How to calculate vacation pay step by step 

Salary employee, per-pay-period accrual

1. Define annual PTO (e.g., 15 days × 8 hours = 120 hours).
2. Divide by pay periods.

• Monthly (12): 120 ÷ 12 = 10.00 hours each period
• Semi-monthly (24): 120 ÷ 24 = 5.00 hours each period
• Biweekly (26): 120 ÷ 26 = 4.62 hours each period
• Round per your policy and display balances on pay stubs.

Example: With 15 days per year and biweekly pay, employees earn 4.62 hours per period. After 10 periods, the balance is 46.2 hours.

Hourly employee, hours-worked accrual

1. Convert annual PTO into an hourly accrual rate.

• Model: 2,080 hours/year for full-time.
• If PTO = 120 hours, rate = 120 ÷ 2,080 = 0.0577 hours per hour worked.

1. Multiply by hours worked each pay period.
2. Apply rules for holidays or leave.

Example: An hourly employee works 320 hours in a quarter. PTO accrued = 18.46 hours.

Vacation pay calculator examples you can adapt

Semi-monthly salary

• PTO: 120 hours annually
• Pay periods: 24
• Accrual: 5.00 hours per period
• Carryover: up to 40 hours
• Cap: 180 hours

Hourly employee

• PTO: 80 hours annually
• Model: 2,080 hours worked
• Rate: 0.0385 hours per hour worked
• A 25-hour/week employee earns ~0.96 hours per week.

Tenure-based grant

• 0–1 years: 10 days
• 2–4 years: 15 days
• 5+ years: 20 days
• Pro-rate new hires joining mid-year.

Communicating vacation pay clearly with employees

Consider creating a guide that explains:

• Your annual PTO/vacation pay offer
• The accrual method with a simple example
• Caps, carryover and proration rules
• How to request vacation and expected notice
• Where to view balances (pay stub, HRIS)

Common mistakes when calculating vacation pay 

• Unclear policy language: Define eligibility, caps and accrual methods.
• Skipping proration: Account for new hires, workforce changes or leaves.
• No visibility: Employees should always see their balances.
• Cap confusion: Clarify whether accrual stops or continues with forfeiture.
• One-size-fits-all: Salary and hourly may need different accrual methods to reach the same annual benefit.

Using a PTO calculator isn’t just about numbers, it’s about consistency and trust. When you apply clear rules, update balances regularly and align your policy with business goals, you build a system employees can rely on. That transparency not only simplifies payroll but also strengthens retention by showing employees their vacation time is valued and protected.