As a business owner, you are not legally required to provide paid time off to your employees, but paid vacation boosts employee morale and satisfaction with the company. Happy employees tend to be the best employees.

Calculating PTO (Paid Time Off) can be a confusing task for some employers. It all depends on which “accrual rate” you decide to use. The very first step to calculating PTO is to decide how many hours you want to allocate to full-time employees each year. Based on a 40-hour work week, you may want to give 40 hours (1 week of vacation time), 80 hours (2 weeks), or some other number in between. Based on the accrual method you choose, you can calculate how much time employees accrue each pay period.

Next, we will go over the most common accrual methods and explain how to calculate PTO based on that method.

Yearly

The simplest way to award vacation time is in a lump sum yearly. Choose a time when your employees accrue their allotted vacation time – usually at the beginning of the year or on the employee’s anniversary date.  At the beginning of the year, add their vacation time. As the employee takes time off, simply subtract it from the current total. The main downside to this accrual rate is new employees have to wait a full year before accruing any vacation time. If you do not want them to wait, one of the other accrual rates may work better for you.

Hourly

This accrual rate is ideal for part-time employees who work variables shifts and are used to sick time. Their allocated time off is directly dependent on their hours worked.

Calculation Example:

For the sake of an example, we will use the most common 40 hour work week.  To figure out how many hours your employee works in a year, multiply 4o hours by 52 weeks (the number of weeks in a year.) Then subtract the 40 hours off (or other amount allocated for PTO.)

40 hours (Hours in 1 work week) x 52 weeks = 2,080 hours

2080 hours – 40 hours (Allocated PTO) = 2,040 hours

2,040 hours – 40 hours (5 paid vacation days off = 40 hours) = 2,000 hours per year

Now to get the accrual multiplier, divide the number of allocated vacation hours by the total hours per year as calculated above.

40 hours (Hours in 1 work week) ÷ 2,000 yearly hours worked = .02 hours

This means that for every hour your employee works, they will earn .02 hours of PTO.

Daily

The daily accrual rate is another rate that is ideal for part-time employees. The only requirement is that the part-time employees work full eight-hour shifts. If the employees only work partial shifts or varying shifts, it may be better to choose a different accrual method.

Calculation Example:

You will first need to multiply the number of work days in a week by 52 weeks to calculate how many work days you have per year (remember to subtract any paid holidays and the days off per year).

5 (Days in a work week) x 52 (Weeks in a year) = 260 work days a year

260 – 5 (Allocated PTO) = 255 days

255 – 5 (Paid holidays) = 250 work days per year

Now to get the accrual multiplier, divide the number of allocated vacation days by the total work days per year as calculated above.

5 ÷ 250 (Work days per year) = .02 days

This means that for every day your employee works, they will earn .02 days of PTO.

Monthly, Twice a Month, or Every Two Weeks

After the yearly accrual method, these are the more common, simpler accrual methods used to calculate PTO.  Employees tend to be less confused because they will see the same amount on each paycheck.

Calculation Example:

You would take the number of yearly allocated PTO hours and divide it by 12 for monthly pay, by 24 for twice-monthly pay, or 26 for bi-weekly pay.

40 (Allocated PTO) ÷ 12 = 3.33 hours accrued per pay period

or

40 (Allocated PTO) ÷ 24 = 1.67 hours accrued per pay period

or

40 (Allocated PTO) ÷ 26 = 1.54 hours accrued per pay period

Whichever method (or variation of methods) you choose to use to calculate PTO for your employees, write it down. Make it policy. It avoids confusion and accusations of favoritism.

It would also be beneficial to invest in a time tracking software that does overtime calculations for you. There are plenty out there, so make sure you review each software to determine if it will be the best fit for your business.