When owning a small business, you may need to calculate paid time off (PTO) or vacation time manually. You may not have a system that will calculate this for you, or you may need to determine how much PTO you can put in your budget.
What is PTO?
PTO refers to paid time off which is exactly how it sounds. It is a benefit an employer offers their employees to be off work.
Typically, PTO is vacation, sick time, personal time, and any other paid time off you want to include in your benefits package. It is a combination of all the reasons your employees would take time off work. For example, instead of offering 40 hours of vacation and 40 hours of sick time, you could offer 80 hours of PTO. This allows the employee to use the hours at their discretion.
Types of PTO
Accrual
Employees earn PTO in each pay period. Accrued time off is PTO that workers earn over time. Your employees would earn PTO hours or days each week, pay period, or month. Typically, the year’s earnings start at the beginning of the year or the employee’s anniversary date.
Lump-sum PTO
Many times, the employer gives the employees all their paid time off at once. There are several options for this.
You may request your employees to accrue their time first. Once they have accrued the time, they then have a lump sum of time to use. For example, you are giving them one day off each month they work. They would have to work 5 months to accrue for 5 days or 40 hours. Then, at the end of the 5 months, they can take time off.
What is the benefit of this method? This ensures your new employees come to work. If a new employee earns vacation immediately, they may take it. The negative is that 5 months can be a long time with no time off.
Many employers request an employee work 3 months before they take any time off. This ensures they don’t take time off as soon as they start work.
Another form of lump-sum PTO is that the employee would receive all their hours of PTO at the beginning of the year. Then they could take it whenever they want with their supervisor’s approval.
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How do You Calculate Accrual Rates for PTO or Vacation?
Generally, you would accrue time rather than days. For example, if your employee has 10 days off, that would be 3.08 hours of accrual time per pay period.
How was this calculated?
If an employee works 40 hours a week, they get 80 hours of PTO per year.
There are different methods you can calculate this to find the daily accrual rate for an employee working 40 hours per week.
First method
Divide the annual PTO hours by the number of pay periods. This example calculates the rate based upon an employee getting paid bi-weekly. This method is less confusing and easier to determine.
If your employees earn 80 hours of PTO per year and gets paid every two weeks, they will earn 3.08 hours of PTO in each pay period.
80/26=3.08
Second method
Some may want more precise numbers by calculating the number of working days. These are the number of working days after the holidays and weekends. This may change depending on the year and the holidays you offer. There are several worksheets available online that can help you determine this number.
You will divide 80 by the number of working days in the year which in this example is approximately 260 days after holidays and weekends.
80 divided by 260=.307. Then, you multiply .307 by the number of total days (10) in your pay period. Each pay period they earn 3.07 hours.
80/260=.307
.307*10=3.07
Writing a PTO Policy
You may allow your employees to use the lump sum of their hours or only allow the accrued amount of time to be used. Also, you may even allow employees to use PTO if they are in the negative. It is important to write your PTO policy clearly in your employee handbook so they know your expectations.
Some things to include in your policy are:
- How can PTO be used (e.g., vacation, sick time, personal)?
- How many hours or days are given by years of service?
- When does the PTO start (date of hire or beginning of the following year)?
- Are negative balances allowed? Some companies allow negative balances to be used with the approval of their manager.
- What type of notice do you require?
- Can unused time be rolled over or sold?
- How much time can be used at once? For example, can they take more than 40 hours at a time? This could also be left up to the discretion of the supervisor.
- What happens to their PTO when they leave the company?
Consider giving your employees more time off with longer service.
Do Employers Have to Give Out PTO or Vacation Time?
Currently, there are no states that require you to pay for vacation time.
There are some states that require an employer to pay the employee unused PTO when they leave the company. Also, some states may require you to allow rollover or payouts of unused vacation time. It is important to research your state laws.
How to Calculate Vacation Pay for Hourly Employees
Once you have determined your amounts of PTO or vacation times and what your employees will earn, you can now calculate their pay.
You should also ensure you have a good timekeeping system. Using a software such as ezClocker can help you with that. Research and purchase good technology that will help you streamline your business practices. Are your employees clocking in or out on a time clock machine or are they writing down their times? By using an affordable app like ezClocker, you will always know how many hours of vacation time they used in the workweek. The information is available to you and your employees so there will be no miscommunication.
Example of PTO or Vacation Calculation
If an employee has accrued 4 months of PTO or vacation time and makes $10 an hour, how do you calculate that?
Assuming the employee earns 3.08 hours per pay period and worked 8 pay periods. You would multiply 3.08 by 8, which equals 24.64. This is how much vacation they have earned.
If they use 20 hours of that vacation, you would multiply 20 by $10, which is $200.
Final Thoughts on Calculating PTO or Vacation Time
To make it easier, you may want to require your employees to take time off in 4-hour increments (assuming they work an 8-hour day). Also, ensure by the end of the year, your calculations add up. Sometimes you also have to make adjustments based on how many actual pay periods are in a year.
There are also several other ways and methods you can calculate PTO and vacation accruals. Find the best one that works for your small business.
Know your state and local laws regarding timekeeping. Once you know your laws, develop a PTO or vacation policy. Furthermore, offering paid vacations is a great benefit. It isn’t difficult if you have the right systems in place and ensure you track it each pay period.
