Vacation accrual is the incremental accumulation of paid time off (PTO) that an employee earns while working at your company. 

The amount of vacation employees get and how they earn it vary from company to company. According to the U.S. Bureau of Labor Statistics, 31% of private industry workers received 10 to 14 paid vacation days in 2025 after working for their employer for one year.

To set a vacation allowance that works for your business, you need to understand how different accrual methods calculate the time employees earn. In this article, we talk about how to calculate vacation accrual using different approaches, what to include in your vacation accrual policy, how rollover works, and whether you have to pay out unused vacation when an employee leaves.

What is vacation accrual?

Vacation accrual can cover vacation offered on its own or as part of a broader PTO allowance. PTO can also include sick days, personal days, and other paid absences. 

Before calculating vacation accrual, you need to understand two main terms:

• Accrual rate: How much vacation an employee earns and how often they earn it, like one hour for every 40 hours worked or 3.08 hours each pay period.
• Accrued balance: The vacation an employee has built up, including unused time carried over from the previous year and minus any vacation they’ve already taken.

While some companies use accrual, others use allotment.

What’s the difference between accrual and allotment?

Accrual and allotment are two approaches for distributing PTO to employees.

With accrual, employees earn PTO incrementally, typically with hours worked, per paycheck, or annually. This approach requires you to track how much PTO each employee earns and uses throughout the year.

With allotment, you give employees a fixed amount of PTO at the start of a specific period, usually a year. For example, you may give them 80 hours of PTO, equal to 10 vacation days, at the beginning of 2027 to use throughout the calendar year. That 80-hour allotment is their full allowance for the year rather than something they build up over time.

If you allot PTO, you need clear rules for anyone joining or leaving partway through the year, otherwise an employee could use a full year’s PTO after working only part of it.

How to calculate vacation accrual

Company policy — and not how employees are paid — determines how employees earn their vacation time.

For example, employees receiving hourly rates or monthly salaries can both earn a fixed amount each pay period. You could also base what they earn on the number of eligible hours they work.

Whichever approach you use, you can state an employee’s allowance in days but calculate and track it in hours. This means they can earn or take a few hours without you having to round the amount to a full day.

Here are two methods you can use to determine how much vacation employees earn.

Method 1: Earning a fixed amount each pay period

With this method, an employee earns the same amount of vacation in each pay period. 

Use this simple formula to calculate vacation days:

Here, an accrual period means one pay period. 

For example, an employee with 20 vacation days a year has 160 vacation hours, assuming each day equals eight hours. If they’re paid every two weeks, divide 160 by 26. The employee then earns about 6.15 vacation hours each pay period. 

Many companies pay employees weekly, biweekly, or semimonthly.

• Biweekly means every two weeks, like every other Friday. This normally results in 26 pay periods a year, with most months having two paydays but some having three.
• Semimonthly means twice a month, like on the 15th and last day, totaling 24 pay periods a year. The gap between paydays may vary slightly because months have different numbers of days.

In the table below, we show how the vacation hours will change if the employee gets 5, 10, or 15 vacation days a year instead of 20, based on whether they’re paid weekly, biweekly, or semimonthly. We assume that employees earn vacation for the full year and receive the same amount of vacation each pay period.

Vacation allowance per year	Total vacation hours per year	Earned each week — 52 periods	Earned every two weeks (biweekly) — 26 periods	Earned twice a 14month (semimonthly) — 24 periods
5 days	40 hours	0.77 hours	1.54 hours	1.67 hours
10 days	80 hours	1.54 hours	3.08 hours	3.33 hours
15 days	120 hours	2.31 hours	4.62 hours	5 hours

Note: For ease of calculation, we’ve rounded the figures above to two decimal places. When calculating payroll for your company, keep unrounded figures so rounding doesn’t change the annual allowance.

This means an employee may get 10 vacation days a year, but how their vacation accrues will depend on how frequently you pay them.

• If they’re paid biweekly, they get 80 ÷ 26 = approximately 3.08 vacation hours per period.
• If they’re paid semimonthly, they get 80 ÷ 24 = approximately 3.33 vacation hours per period.

Either way, the employee earns the same 80 hours of vacation over the year. If a payroll calendar contains an extra weekly or biweekly period, divide the annual allowance by the actual number of periods.

Method 2: Earning vacation based on hours worked

With this approach, you give employees vacation days based on their eligible hours. Your policy should clearly state whether eligible hours include overtime and paid leave along with regular working hours. 

For example, if you give employees one vacation hour for every 40 eligible hours worked, an employee who works 320 eligible hours earns:

Now add those eight hours to the employee’s existing balance and subtract any vacation taken to get their vacation balance.

As a hypothetical example, if the employee has 16 hours carried over from before and has already taken eight hours this year, the formula to calculate their balance would be:

How to choose the most suitable method for your company

The two methods of earning vacation are useful for different types of employees. 

• If your employees get a fixed annual allowance, giving them equal amounts each pay period will keep it simple. 
• For employees with variable schedules, hours-based accrual may make more sense.     

As another example, you might add the same amount to a full-time employee’s balance each pay period, while basing a part-time employee’s vacation on the eligible hours they work. However, this will require you to calculate vacation for full-time and part-time employees differently.

Eligibility and company policy will determine which calculation will apply.

What is a vacation accrual policy, and how can you create yours?

A vacation accrual policy contains a company’s written rules for paid vacation. When you write one, you need to follow the vacation laws in each state where your employees work.

The Fair Labor Standards Act (FLSA) doesn’t require companies to offer PTO, so employers and employees, or their representatives, agree on whether the company will provide paid vacation, and if so, what approach it will follow. 

Separately, state laws may apply if a company chooses to offer paid vacation. For example, California treats earned vacation as wages and doesn’t allow employers to take it away.

Your policy should cover the five areas below while meeting all applicable laws.

1. Eligibility and start dates

State which employees qualify for paid vacation and whether the rules differ for full-time, part-time, temporary, or other employees.

Include when employees start earning vacation, when they can first use it, and how long they must work for the company before they start earning more vacation.

2. Accrual method and eligible hours

State how much vacation employees can earn and how they earn it. 

Explain how you calculate vacation for part-time schedules and incomplete pay periods, how often you update balances, and whether overtime and paid leave count as eligible hours.

Regularly check that your payroll processes match your vacation policy. Stephanie Heathman, CEO and Senior Principal Consultant at The HR Innovator Group, explains why regular checks matter:

“Small configuration errors compound quickly across a workforce. My professional recommendation is to audit accrual rules against the written policy at least annually and whenever payroll systems, policies, employee classifications, or pay frequencies change.”

And Allen Lenth, owner of Executive Tax Solution and small business payroll practitioner, shows what could go wrong if payroll settings don’t match your vacation policy:

“Suppose a policy awards one vacation hour for every 40 hours worked. An employee works 45 hours and also receives eight holiday hours. The correct accrual based on hours worked is 1.125 hours. If the payroll system mistakenly includes the holiday, it awards 1.325 hours. That small weekly error can overstate the employee’s balance by more than 10 hours over a year. Employers should define which earning codes qualify, test regular, overtime, holiday, and vacation checks separately.”

3. Accrual caps

An accrual cap can mean a balance cap or an annual limit. State which one your policy uses.

• A balance cap limits how much unused vacation an employee can build up. Once they reach the cap, they stop earning vacation until they use enough to fall below the cap. However, they don’t lose any vacation they’ve already earned.
• An annual limit sets the maximum vacation an employee can earn in one year.

High caps can put you at risk of owing employees a lot of paid time off, leaving you short-staffed when multiple employees want the same days or weeks off.

Devin Hornick, Co-Founder and Partner at KORE1, suggests how to handle this:

“I think a good goal is to eliminate liability without creating an incentive for employees to stockpile days. Organizations can do this by imposing a reasonably high cap and setting a clear use-it-or-lose-it threshold, above which no days carry over.”

4. Leaving the company

State whether you’ll pay employees for unused vacation when they leave. But whether you actually pay, and how much, will also depend on other factors.

Your policy may state that employees won’t get paid for any unused vacation, but state laws and an employee’s contract or union agreement may change the answer. In California, for example, employers normally have to pay for any earned vacation employees have left, based on their final rate of pay — unless there’s, for example, a collective bargaining agreement with a union that says otherwise.

Lenth explains what payroll needs to check: 

“Consider an employee leaving with 32 unused vacation hours at $25 per hour. Payroll can calculate the potential $800 payout, but it shouldn’t automatically pay or erase the balance. First, verify the employee’s work state, written PTO policy, employment agreement, accrued balance, applicable pay rate, and final pay deadline.”

5. Carryover

State how many unused vacation hours employees can carry into the next year and whether your company pays them for any hours above that limit or removes those hours from their balances. Check in the law in the states you operate in before setting the rules.

North Dakota, for example, lets employers set a deadline for employees to use their vacation. Employees can lose any hours left after that date, but only if the employer told them about the rule and gave them a reasonable chance to use the time.

How to automatically calculate vacation accruals

When you use Buddy Punch, it applies your company’s vacation rules automatically instead of you having to update every employee’s balance by hand. 

Follow Buddy Punch’s accrual setup instructions to see how to add these rules for vacation accrual to your account. First, choose how much vacation employees earn and whether they earn it each pay period, based on hours worked, or once a year.

Then decide whether each rule applies to everyone or only selected employees. For example, give your full-time employees a fixed amount each pay period and base part-time employees’ vacation on their eligible hours. 

Set any balance cap and decide how many unused hours your employees can carry over. Make sure both settings match your written policy and follow any laws that apply.

When you’ve switched on the rule, Buddy Punch adds newly earned vacation to each employee’s balance automatically. 

Employees can also see how much vacation they have available. When they take vacation, Buddy Punch deducts those hours from their balance and adds the time off to their timesheet. You can check in real time how much vacation time an employee has earned or used. 

To see how Buddy Punch calculates vacation accruals and keep the balances updated for you, start your free trial today.

Contributors

• Allen Lenth, Owner and Small Business Payroll Practitioner, Executive Tax Solution
• Devin Hornick, Co-Founder and Partner, KORE1
• Stephanie Heathman, CEO and Senior Principal Consultant, The HR Innovator Group