The small business holiday pay guide: How to calculate it and stay compliant in 2026

Holiday pay is an incentive and employee benefit that helps keep businesses on track during the holidays. As of November 2025, four out of five civilian and private industry employees have access to holiday pay, according to the US Bureau of Labor Statistics. 

That’s great news for employees, particularly in 2025, which is poised to be a big year for retailers across the country. All told, consumers plan to spend 25% more during the 2025 holiday season—an estimated $263 billion—compared to 2024, says Intuit QuickBooks’ 2025 Holiday Shopping Report. That means more orders, more restocking, and potentially more hours to fill, even on holidays.

So how can small businesses ensure that their employees—retail industry or otherwise—are up for the challenge of working when many others are enjoying the day off? It all comes down to holiday pay. 

Let’s dive into how holiday pay works, how to calculate it, and how holiday pay policies can vary.

What are the holiday pay laws for 2025?

Holiday pay is not mandatory for private employers, according to the Fair Labor Standards Act (FLSA). Nor does the U.S. government require private employers to observe federal holidays. In most cases, it’s up to each individual private company to determine their holiday pay policy.

Many companies offer extra compensation such as an hourly rate of time and a half to incentivize employees to work on holidays.

Holiday pay for federal employees

Holiday pay for federal employees includes 11 federal holidays and Inauguration Day (when applicable). Full-time employees receive an "in lieu of" holiday when a holiday falls on the employee's non-workday. 

Holiday pay for private sector employees

Private businesses in the United States do not have to offer holiday pay and do not have to observe federal holidays. As a private business, you can select which holidays to include if you’d like to offer holiday pay. You also have the flexibility to create qualifying criteria for your holiday pay policy.

This may include having different policies for full-time, part-time, and seasonal employees. You’ll just want to ensure your holiday pay policy is clearly outlined in your employment contracts.

Holiday pay exceptions

Rhode Island is the only state that requires holiday pay. According to the state’s Department of Labor and Training, “Work performed by employees on Sundays and holidays must be paid for at least one and one-half (1.5) times the normal rate of pay for the work performed.”

Companies with cross-border employees should also pay careful attention to their applicable employment laws. For instance, Canada requires that all Canadian employees receive statutory holiday pay, even if the employer is a U.S. company. 

In all other states, businesses do not have to offer holiday pay and do not have to observe federal holidays. If you offer holiday pay, you can select which holidays to include. You also have the flexibility to create qualifying criteria for your holiday pay policy.

This may include having different policies for full-time, part-time, and seasonal employees. You’ll also want to ensure your holiday pay policy is clearly outlined in their employment contract. 

Nonexempt vs. exempt employees

You may decide to structure your holiday pay differently for exempt vs. nonexempt employees. Examples of exempt employees include executive-level positions and professional roles. Nonexempt employees include hourly workers, skilled tradespeople, and technicians.

Here’s how holiday pay usually works for exempt and nonexempt employees: 

• Exempt employees are typically salaried and not eligible for overtime pay. They receive their full salary regardless of the number of hours worked or the holidays taken. 
• In some cases, these normally exempt employees might receive a small bonus or one and a half hours of paid vacation time for every hour they work on a traditional holiday, but this is given at the discretion of their employer. 
• Nonexempt employees are usually hourly workers who are eligible for overtime pay. They may receive holiday pay (if your company offers it) for working on designated holidays.

What are the holiday pay trends for 2025?

Offering a premium pay rate isn’t the only way to show employees you value their time during holidays. Although many professionals have gone back to the office, working from home remains a highly sought-after benefit. Giving your team the option to work offsite on holidays is one way to keep morale high while ensuring the day’s tasks still get done. 

Another holiday trend is to offer flexible scheduling when possible. Allow employees to set their own schedule for the day so they can still celebrate with loved ones or spend time with kids who are likely out of school.

How do you calculate holiday pay? 

Calculating holiday pay for exempt employees typically involves an additional compensation rate. It’s generally a premium to the employee's regular pay rate, such as 1.5 or double their typical hourly rate.

Here’s how to calculate holiday pay:

The holiday pay formula:

Employee hourly rate x holiday premium (e.g., 1.5 or 2) x Hours worked on the holiday = Holiday pay

While this formula is the standard for calculating holiday pay, employers have the flexibility to establish their own rates and conditions. Some employers may pay an even higher rate, such as triple time, depending on the circumstances.

What is an example of holiday pay? 

Let’s say your business is open on a designated holiday, such as Memorial Day. You have an employee that makes $22 per hour. Your holiday pay policy is to pay double time (two times their regular hourly rate) for working hours on designated holidays.

If your employee works eight hours on Memorial Day, their holiday pay for the day is: 

• Employee’s hourly rate x Holiday premium x Hours worked on the holiday 
• $22 per hour x 2 x 8 hours = $352 

Alternatively, if your holiday pay policy is to pay employees time-and-a-half, the holiday premium would be 1.5. In that case, your employee’s holiday pay for an eight-hour shift on the holiday would be $264 ($22 x 1.5 x 8).

How is holiday pay determined?

Because there aren’t any federal requirements for private employers regarding holiday pay, determining your company’s policy is up to you. As for calculating each employee’s holiday pay, you may want to leave that math to your payroll provider. QuickBooks Payroll can track and apply holiday pay, and in most cases, setting up paid time off for holidays is quick and easy. 

What are the benefits of holiday pay? 

Holiday pay provides several benefits for your business and your employees. In the workplace, holiday pay helps maintain productivity and ensures your business is adequately staffed during the holidays. Paid holidays actually cost employers very little in most cases—an average of 77 cents per employee hour worked, according to a 2018 survey by the Bureau of Labor Statistics.

As for employees, holiday pay is a great incentive for earning more money during the busy holiday period.

Here are the key reasons you might consider offering holiday pay:

• Improves productivity
• Builds motivation
• Fosters employee loyalty
• Promotes a positive work culture
• Boosts employee satisfaction

Offering holiday pay as part of an employee's compensation package can also be a way for employers to attract and retain talent. It demonstrates that the company values work-life balance and acknowledges the additional effort and considerations for working holidays.

How to develop a holiday pay policy 

Developing a holiday pay policy ensures fair and consistent compensation for employees who work on holidays. It may also be part of your broader paid-time-off policy. 

Your holiday pay policy takes into account federal holidays, religious holidays, and other company policies. Here’s how to develop a paid holiday policy:

1. Define your holidays 

When implementing a holiday pay policy, it is crucial to define the specific holidays and dates that will qualify for holiday pay. These days typically include federal holidays, like New Year's Day and Independence Day.

Companies may include optional holidays, like those with cultural or religious importance. Some companies also offer floating holidays that employees can use at their discretion. Consider your workforce's diversity and background, and accommodate specific holidays relevant to your region.

2. Clearly state who’s eligible and when

Eligible employees for holiday pay typically include full-time employees who work 40 hours per week. Part-time employees may also be eligible, depending on your specific criteria. 

If you have overnight shifts that cross into or out of paid holidays, consider whether or not the entire shift will be paid at a premium rate, or if only the hours worked on the holiday itself will be eligible. 

For example, say an employee works from 10 p.m. on July 4 to 6 a.m. on July 5. Will that employee earn 1.5 times their hourly rate for all eight hours, or only for the two hours worked on Independence Day? Whatever the decision, be sure your team understands your company’s policy up front to avoid any unnecessary tension.

3. Decide how you’ll calculate holiday pay 

The most common holiday pay rate formula is 1.5 times or 2.0 times the employee's regular pay rate. For example, if you pay 1.5 times and an employee earns $15 per hour, their holiday pay rate would be $22.50 per hour. Alternatively, if you offer 2.0 times holiday pay, the hourly holiday pay for that employee would be $30 per hour.

4. Communicate your holiday pay policy 

Let employees know about your holiday pay policy, and remind them ahead of the holiday. Clearly outline your policy in employee handbooks and employment contracts. 

Businesses that plan extended hours for holiday shopping should also communicate their schedules to employees. Consider hiring seasonal employees if you find yourself in need of additional help.

Industry-specific considerations for holiday pay

According to the Bureau of Labor Statistics, the likelihood that a worker will receive holiday pay varies by holiday, by industry, by region, and whether or not they’re in a union. Here are some interesting findings from their 2018 holiday profiles:

Across all holidays surveyed, workers in management, business, and financial industries were the most likely to receive holiday pay. Workers in the service industry, as well as those in natural resources, construction, and maintenance industries were least likely to get paid time off. 

Workers in the Midwest or Northeast also had a higher rate of paid holidays than those in the South. In some cases, the percentage of workers who received holiday pay in other regions of the country was double that of those who received it in the South. 

Union workers unilaterally received more paid holidays than nonunion workers. 

And finally, New Year's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving, and Christmas Day were the most common days for workers to receive holiday pay; conversely, holidays like Veterans Day, New Year’s Eve, and Christmas Eve saw far fewer workers getting holiday pay.

Who’s eligible for holiday pay?

Holiday pay is a benefit that can vary depending on company policy and legal requirements. Generally, full-time employees are eligible for holiday pay, regardless of whether the holiday falls on a scheduled workday. 

Part-time employees may also be eligible for holiday pay, which may be prorated based on the number of hours they worked. Seasonal employees may or may not be eligible for holiday pay, depending on the specific terms of their employment contract or company policy.

Do employers have to offer paid time off for holidays?

Employers in the US are not legally required to offer paid time off for holidays. The Fair Labor Standards Act (FLSA), the federal law governing employment practices, does not require employers to provide holiday pay or time off for holidays. It is up to each individual employer to determine their holiday policy and whether or not they will offer time off or additional compensation for holidays worked. However, if an employer has a holiday pay policy, they must apply it consistently.

What are floating holidays?

Floating holidays are paid time off that employees can take on a day of their choosing, separate from traditional fixed holidays. They allow employees to use their paid time off for personal or religious observances that align with their individual preferences.

How to streamline your payroll process

While holiday pay is not legally required for private businesses, it can help create a productive and positive work environment. The most important part is to make sure your policy is clearly communicated. Consistency in applying holiday pay policies is vital to avoid misunderstandings or conflicts.

Accounting software with integrated payroll features like time tracking and tax penalty protection can help ensure your holiday pay is accurate and adheres to your company’s paid holiday policies.

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