Accrue vacation in Payroll

If accruing vacation for your employees, there are different options to choose from. Regardless of which option you choose, they will all accrue the vacation dollar amount as a percentage of vacationable earnings.

For example, if you earn $1,000 in vacationable earnings, and your vacation rate is 4%, you will earn $40 ($1,000 x 4%) in accrued vacation dollars.

The policy types below are differentiated by when the vacation time is accrued. Note that commissioned employees cannot accrue vacation.

In this article, you'll learn how to accrue vacation in payroll with the following methods:

• Per hour worked
• Each pay period
• Beginning of year
• Anniversary date
• Vacation reporting

Per hour worked

1. Enter the Vacation rate as a percentage.
2. Select Set and save policy.

How this method works

• The percentage entered (for example, 4.00%) will be your set Vacation rate on all vacationable earnings and vacationable time worked.
• 4% will be accrued on all vacationable earnings and vacationable time worked.
• For example, an employee has worked 40 vacationable hours and has earned $1,000 in vacationable wages for the week. This employee will accrue:
  • $40 in vacation pay (4% x $1,000), and
  • 1.60 hours (4% x 40 hours)

With this method, the more time the employee works, the more vacation time the employee will earn.

Each pay period

1. Enter the percentage in the Vacation rate field. Total vacation time represents the total hours the employee is entitled to in a year:

• If the vacation rate is 4%, this is equal to 2 weeks vacation. The number of hours shown here is equal to two weeks of time off. The default assumes the employee works 40 hours/week, therefore 80 hours (40 hours x 2 weeks).
• If the employee does not work 40 hours/week, select Edit and make the appropriate adjustment.

2. Select Set and save policy

How this method works

• The percentage entered (for example, 4.00%) will be your set Vacation rate on all vacationable earnings
• Vacation time (hours) will be calculated based on the pay frequency
• For example, a weekly paid employee has worked 40 hours and has earned $1,000 in vacationable wages. This employee will accrue:
  • $40 in vacation pay (4% x $1,000), and
  •  1.54 hours (80 hours / 52 weeks).

With this method, the employee will earn the same amount of vacation time every pay period regardless of how many or how few hours are actually worked.

Beginning of year

1. Enter the percentage in the Vacation rate field. Total vacation time represents the total hours the employee is entitled to in a year:

• If the vacation rate is 4%, this is equal to 2 weeks of vacation. The number of hours shown here is equal to 2 weeks of time off. The default assumes the employee works 40 hours/week, therefore 80 hours (40 hours x 2 weeks)
• If the employee does not work 40 hours/week, select Edit to adjust accordingly.
• Vacation hours will accrue all at once every January 1st.

2. Select Set and save policy

How this method works

• The percentage entered (for example, 4.00%) will be your set Vacation rate on all vacationable earnings.
• Vacation time will accrue in full every January 1st.
• For example, a weekly paid employee has worked 40 hours and has earned $1,000 in vacationable wages. This employee will accrue:
  • If this is the employee’s first paycheque in the year (on or after January 1)
    • $40 in vacation pay (4% x $1,000) and
    • 80 hours
  • If this is not the employee’s first paycheque in the year
    • $40 in vacation pay (4% x $1,000) and
    • 0.00 hours

With this method, the vacation dollars and vacation hours seldom reconcile, so you might have instances where the vacation hours go into the negative if time is taken before January 1st. This is not a problem, so long as your employee understands that the vacation earned in dollars and hours accrue at different times.

Anniversary date

1. Enter the percentage in the Vacation rate field. Total vacation time represents the total hours the employee is entitled to in a year:

• If the vacation rate is 4%, this is equal to 2 weeks of vacation. The number of hours shown here is equal to 2 weeks of time off. The default is for an employee who works 40 hours/week, therefore 80 hours (40 hours x 2 weeks).
• If the employee does not work 40 hours/week, select Edit and make the appropriate adjustment.

2. Select Set and save policy.

How this method works

• The percentage you entered (for example, 4.00%) will be your set vacation rate on all vacationable earnings.
• Vacation time accrues in full every year on the employee’s anniversary date.
• For example, a weekly paid employee has worked 40 hours and has earned $1,000 in vacationable wages. This employee will accrue:
  • If this is the employee’s first paycheque dated on or after the Anniversary date
    • $40 in vacation pay (4% x $1,000) and
    • 80 hours
  • If this is not the employee’s first paycheque dated on or after the anniversary date
    • $40 in vacation pay (4% x $1,000), and
    • 0.00 hours

With this method, the vacation dollars and vacation hours seldom reconcile, so you might have instances where the vacation hours go into the negative if time is taken before the anniversary date. This is not a problem so long as your employee understands that the vacation earned in dollars and hours accrue at different times.

Accrued vacation policies: Accounting entries to your chart of accounts

Here are some accounting rules highlights for your chart of accounts - when an employee is on any accrued vacation time policy (per hour worked, each pay period, beginning of year or anniversary date).

When vacation dollars are accrued

• Debit (increase) Wage expense (or vacation expense)
• Credit (increase) Vacation liability

When vacation time is taken (vacation hours entered in Run Payroll)

• Debit (decrease) Vacation liability
• Credit (decrease) Bank - net pay

When vacation dollars are paid out (no vacation hours taken)

• Debit (decrease) vacation liability
• Credit (decrease) bank - net pay

How to pay out accrued vacation in Run Payroll (two methods)

Vacation Time Off (vacation hours used)

In this example, when an employee takes 8 hours of vacation time:

• 8 hours entered in run payroll Vacation Pay
• This is then multiplied by the regular pay rate per hour
• This will reduce both vacation balance (dollars) and vacation time

Accrued vacation payut (Vacation hours not used)

In this example, when an employee is terminated or the employer wants to reduce the vacation liability balance.

You must enable the Accrued vac payout earning item for the employee:

1. Select the employee’s profile to edit.
2. In the How much do you pay section, select the Edit ✎ icon.
3. Check Accrued vacation payout.
4. Select Done, then Done.

In Run Payroll, enter the dollar amount of vacation to pay out in the Accrued vacation payout field:

• This will reduce the Vacation balance (dollars)
• This will not reduce Vacation time.

How to make adjustments

The employer can update the vacation time balance or the vacation dollar amount balance at any time. When you make an adjustment to the vacation dollar balance (up or down), an accounting entry is made which impacts the Chart of Accounts:

• Increasing the vacation dollar amount changes these accounts:
  • Debit (increase) Wage expense (or Vacation expense)
  • Credit (increase) Vacation liability
• Decreasing the vacation dollar amount changes these accounts:
  • Debit (decrease) Vacation liability
  • Credit (decrease) Wage expense (or Vacation expense)

Vacation reporting

1. Navigate to Reports (Take me there).
2. Select Payroll reports, then select Vacation and Sick Leave to find a Vacation Accrual report.

You can access a detailed breakdown of the employee’s vacation time and dollar balance.