This article is part of a larger series on How to Do Payroll.
Small businesses that offer paid time off (PTO) must manage accruals accurately to avoid labor law violations. Our PTO accrual calculator lets you determine the appropriate accrual rate to use per pay period based on your business workdays, hours in a workweek, and annual vacation days.
Results listed above are rounded to two decimal numbers. This may affect the actual results.
1. Decide How Much PTO to Provide Employees Annually
The first step to calculate a PTO accrual is to determine how many days or hours per year you want to grant your employees. According to SHRM, the average company grants 18 days of PTO, which may or may not include sick leave. That number reflects the fact that many firms tier their PTO programs—for example, giving new hires less time off, such as only one week off per year, while giving those with more years of service more time off, such as two or three weeks per year.
However, smaller businesses and startups may not be able to afford to give new hires that much paid time off. In fact, according to SHRM, 43% of businesses don’t offer PTO at all. To keep our math simple, we’ll use an example of two weeks (10 days of PTO per year).
To calculate PTO, this number will be converted to hours by multiplying the number of days provided by the standard hours worked per week.
Here’s the math: two weeks = 10 days x 8 hours a day = 80 hours
2. Figure Out Your Standard Hours Worked Per Week
While a 40-hour workweek is pretty standard, not every company has employees who work 40 hours per week. Some companies consider employees full-time and grant them PTO and vacation when they work as few as 25 hours per week. If you use our calculator above, you can input your business’s actual workweek hours to get a more accurate accrual rate before you process your payroll.
3. Determine Total Annual Work Hours Available
You then have to determine how many weeks per year your business operates so that you can calculate how many work hours per year employees are eligible to accrue PTO annually. This “hours per year” number is used as the denominator when calculating your PTO accrual rate.
The standard available work hours per year used by human resources experts is 2,080. That’s equivalent to the number of weeks per year (52) multiplied by the number of hours the average employee works each year.
Example: ABC Company has a standard 40-hour workweek and is open 52 weeks a year.
Here’s the math: 40 hours x 52 weeks
= 2,080 hours per year
If you grant your employees two weeks of vacation and PTO each year, that would equal (in this example) 80 hours per year. That’s your numerator.
Here’s the math: 80 hours PTO / 2,080 hours per year
= 0.038 hourly PTO accrual rate
What that means is that for every hour worked, the employee in this example would accrue 0.038 hours of PTO. If they worked on average 40 hours a week, or eight hours a day, the accrual rate would be:
Hourly Accrual Rate
0.038 hours of PTO for each hour worked
Daily Accrual Rate
0.304 hours of PTO for each day worked
Weekly Accrual Rate
1.52 hours of PTO for each week worked
To calculate each employee’s PTO accrual rate correctly, you need to provide data for these three variables described in the steps above. Your results may differ depending on rounding and how many decimal places are used in your calculation. (We rounded to two digits in our examples.) However, our calculator above only rounds up the result, not the interim calculations.
Subtract Paid Holidays
If your business provides paid holiday time off, you may want to subtract those days from the total so as not to allow employees to accrue paid time off on days they already are getting paid for as holidays. For example, if you give employees 15 paid holidays a year and consider each day to be worth eight hours, you’ll want to subtract those hours from the total work hours available each year.
Here’s the math: 2,080 work hours per year – (15 days x 8 hours a day = 120 hours)
= 1,960 available work hours per year
In this case, your numerator (PTO hours given) would be 80, while your denominator would be 1,960, resulting in a more accurate PTO accrual rate of 0.04 hours of PTO per hour worked.
4. Identify Your Business’ Start Date for Accruals
Our calculator assumes a 365-day year. However, not all businesses start the year at the same point in time. While most small businesses use a calendar year, some use a fiscal year, whereas others use the employee’s hire date. While you don’t need this information for our basic calculator above, you do need it if you want to determine how much PTO or vacation time an employee has earned or taken during a year.
Annual Accrual vs Lump Sum
Most small businesses calculate PTO on a calendar year basis. In fact, if you grant PTO as a lump sum at the start of the year, you wouldn’t need to manage accruals at all. On the calendar, fiscal, or anniversary date, employees would receive their lump sum balance to use throughout the year. You would then merely subtract hours for each day they take off until their PTO or vacation time is used up.
The three most common time frame options for granting and tracking PTO are:
A calendar year starts January 1 and ends on December 31. However, not all businesses use the same calculations for a given year. For example, some businesses are open 52 weeks a year, while others may close during the holiday season and work only 50 weeks a year.
Therefore, in addition to determining what constitutes a vacation accrual year for your business, you’ll need to figure out how many weeks, days, or work hours are available to work in that time frame, using the examples provided in step 3 above.
Some businesses set up their accounting year based on a fiscal start and end date used for accounting and tax purposes. For example, they may start their fiscal year on the first of September and end it on August 31.
Other businesses grant employees a fixed amount of paid time off that starts on their hire date, or it may not start until they’ve been with the company for a specified amount of time, such as 30 or 90 days. In any case, each employee’s accruals would start on the date they were hired, and you’d need to manage how much each has earned and used based on their work anniversary date each year.
5. Use the Correct Accrual Rate per Cycle
To ensure you calculate employee PTO balances correctly, you have to apply the right accrual rate to the actual payroll processing cycle you use to pay employees. In fact, in some states, the accrual rate information regarding how much PTO and sick leave employees have earned must be printed on each pay stub.
In the examples above, we used a weekly pay cycle and a standard five-day, 40-hour workweek. That accrual rate would be 1.52 hours of PTO earned (accrued) for each week worked.
80 hours PTO / 2,080 hours per year = 0.038 hourly PTO accrual rate x 40 hour week
= 1.54 hours of PTO earned for each hour worked
This is the best rate to use when calculating PTO accruals for employees whose work hours vary. For instance, they may work 25 hours this week, 40 hours the next, and 32 hours the following week. It doesn’t matter what their actual work hours are each week, as the accrual rate will accurately determine how much PTO they’ve earned that pay period.
Calculating accruals for a biweekly pay cycle is just as easy as it is for a weekly pay cycle—it’s just the pay period lasts two weeks instead of one. The hourly accrual rate is the best to use for accuracy, but some businesses prefer to use a simpler calculation based on the fact that biweekly pay results in 26 payroll cycles per year. Using a biweekly accrual rate makes the most sense when your employees are salaried and get paid the same each pay period.
80 hours of PTO per year / 26 pay periods
= 3.08 hours of PTO earned every two weeks (biweekly period)
Semimonthly pay is provided two times a month, meaning that you’ll have 24 pay periods a year. That makes your PTO accrual just as easy, but it may not be accurate if, for example, an employee takes off unpaid leave, reduces to a part-time schedule, or is out for an extended period (such as for parental leave).
80 hours of PTO per year / 24 pay periods
= 3.33 hours of PTO earned every two weeks (semimonthly pay period)
A monthly payroll cycle isn’t allowed in all states, and is commonly reserved for upper-level management. However, if you manage your accruals monthly, the calculation is pretty basic.
80 hours of PTO per year / 12 pay periods
= 6.67 hours of PTO earned every month (monthly period)
Other Considerations When Calculating PTO & Vacation Accruals
Often, salaried employees are granted a fixed rate of paid time off based on their average workweek—it can be a number of hours or days a year, such as 40 hours a year, or five days off for vacation.
Calculating PTO accruals and employee balances requires you to make sure that you consult federal and state labor laws. It also requires a few decisions such as whether to include sick leave as part of PTO or not.
It’s best practice to track your sick leave accruals and balances in a separate time bucket than PTO available for vacation and other personal reasons. That’s because in some states, sick leave must be paid out upon termination, while PTO doesn’t have to be.
While last year’s PTO balance doesn’t affect this year’s accrual rate, it does affect the starting balance at the beginning of the year (calendar, fiscal, or anniversary), and the total balance of PTO your employee has available. More than three-fourths of companies offering PTO allow employees to roll over some amount.
In states like California, if you offer PTO, you must allow employees to roll it over, or pay it out upon termination. There’s no “use it or lose it” option allowed.
Part-Time Employees vs Full-Time Employees
According to SHRM, businesses provide more paid time off to salaried employees (57%) than to hourly employees (29%). Since hourly employees don’t work fixed or standard hours, you may want to determine their accrual rate per hour worked, rather than providing them a fixed number of hours per year, as an example. Or, you may want to set your accrual rate to match what full-time employees receive, which will end up being less, as they work fewer hours.
Another consideration when managing PTO accruals is determining whether you’ll allow your employees to have a negative PTO balance. That can happen, for example, if you offer two weeks of PTO a year and an employee wants to use it all in February. You’d need to track the PTO used before it’s been earned, resulting in a negative PTO balance for that worker.
These considerations are important to document in your PTO policy, as well as in your employee handbook, to avoid confusion as well as potential litigation from workers who may feel their PTO isn’t being managed fairly.
How a PTO Vacation Accrual Calculator Works
Like any data tool, a PTO calculator is only as good as the data you key into it. That’s why we encourage you to consider all the variables described in the steps above, in addition to how much time you offer as PTO to your employees. And, consider whether full-time and part-time employees are eligible—and when. Once you determine your PTO accrual rate, you will need to plug that rate into your payroll software or provide it to your payroll service provider.
In fact, the PTO accrual rate serves only one small part in determining how much employees will be able to use. Also included in an employee’s PTO balance is the amount they’ve used, the amount they have (or can roll over), and any amounts you might grant to new hires as a condition of their employment agreement. Here are some examples:
- Negotiated PTO: Perhaps your new hire negotiated an extra week of vacation to accept the job offer. You may need to accrue three weeks of PTO for that employee as opposed to the two weeks everyone else gets.
- Returning employee: Let’s say a great employee moved out of state and then moved back seven months later. You may want to reinstate their unused PTO.
- Employee on leave: When an employee takes parental leave for four months, some companies will allow that employee to retain their employment benefits during the time away from work. This may include PTO accruals as well as health insurance.
Alternatives to Using a Vacation Accrual Calculator
Instead of manually calculating PTO balances, you may want to consider software that does it for you. Whether you choose a time and attendance software that provides an accruals feature, or a full-service HR/Payroll software, there are many affordable options.
Here are a few software we recommend that can help you manage your PTO accruals.
Salaried employee payroll because it tracks PTO and sick leave requirements by state
Businesses ready to upgrade to an HR software suite with PTO/vacation tracking included
Companies (up to 100 employees) that need scheduling, time tracking, and leave management
Restaurants/retailers wanting to track time off and shift swaps for hourly workers
Companies wanting to create custom forms to track time off and leave balances
A PTO accrual calculator helps you do the complex math required to determine how much PTO and vacation time employees earn each pay period. The data you need to know is how many hours employees are eligible to work each year, how many hours they work on average each week, and how many days, hours, or weeks of vacation time you provide them.