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Dec 01, 2021 ConnectPay

3 Methods for Calculating Paid Time Off Accrual for Small Businesses

3 Methods for Calculating Paid Time Off Accrual for Small Businesses

Are you looking for a quick way to reduce employee turnover? We’ve all heard about the benefits of offering and encouraging PTO for employees. According to Forbes, using PTO has many benefits, such as increased productivity, better employee retention, and more. 

In short, PTO like holidays, vacation, and sick time is essential for your workforce. However, understanding what needs to be offered and working out the logistics of PTO can be two very different things. How can you best calculate paid time off accrual for your employees?

This post will examine three options for calculating PTO accrual and delve into the pros and cons of each method. By the time you finish reading, you should understand the best option for your business and how to simplify your time tracking through payroll processes. 


Options for Calculating Paid Time Off Accrual for Small Businesses

Calculating paid time off accrual is frequently a headache for employers. You can explore so many different options, and almost all of them require diligent tracking and calculations in your payroll system.

The best PTO accrual calculation method for your business will depend on a few factors. First of all, the type of employees that make up your workforce. Are the majority of your employees exempt or non-exempt? Full-time or part-time? Another critical factor to consider is state requirements regarding PTO payouts. Each state has different rules regarding the final paycheck for employees. If you operate in a state that requires PTO payouts for employees who leave your organization, you may choose a different accrual option from what you would if your state does not require such a payout.

At ConnectPay, we know these factors and more can be a lot to keep track of. That’s why we offer timely expert advice for our clients regarding all their payroll questions and concerns. Check out our resource on the Six Pillars of Payroll for more information, and read on to learn about three options for PTO accrual.

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Annual Bank

  • What is it? If you offer PTO to your employees through an annual bank, you will credit your employees with their entire yearly PTO allowance at the beginning of each fiscal year. Employees can take their PTO whenever they like throughout the year and will not need to accrue hours before using them.
  • Pros: The main pro of using an annual bank system for PTO is that this system does not require calculation or tracking on the front end. Employees also tend to like this option, as it gives them more flexibility with when and how they can use their PTO. 
  • Cons: A con of this approach is that employees can use all their PTO early in the year and then leave your organization before the end of the year. 

Accrual by Hours Worked

  • What is it? If you calculate your accrual based on hours worked, you are tracking the actual worked hours of each employee and awarding PTO based on those hours. 
  • Pros: The main positive of tracking your PTO accrual by hours worked is that it’s very exact. When using this method, you can be confident that each employee is offsetting their paid time off with worked hours. 
  • Cons: This method can be a bit tedious to track. It requires a time-clocking process for employees, which can be difficult if your workforce is exempt. This method is also the most calculation-intense system of PTO accrual tracking. To implement this model, you will want to learn more about the best time clock software for small businesses.

Related read: Which Employees Are Exempt From Tax Withholding?


Accrual by Time

  • What is it? If you choose to calculate your employees’ PTO accrual by time, you will determine each employee’s PTO based on the number of days or weeks that have passed since the last pay cycle, regardless of the employee’s actual worked hours in that time. This is the method of time tracking ConnectPay generally recommends to our clients. 
  • Pros: A pro of calculating accrual by time is that it is simple to calculate PTO using this method. Since you are calculating based on an across-the-board standard (time), it is easy to apply your PTO calculations to all of your employees’ records each pay period. 
  • Cons: The main downside of this method is that it is inexact in ensuring each employee’s worked hours offset the PTO they have taken each pay period.


How Will You Calculate Paid Time Off Accrual for Your Small Business?

The methods outlined above are all valid and acceptable ways to track paid time off accrual for your small business. No method is inherently better or worse than any other method, but chances are there is a best method for your specific business operations and practices.

Related: Ultimate Guide: Payroll services for small businesses

You can also use different accrual methods for diverse employee populations. For example, accruing PTO for exempt employees by time and accruing PTO for non-exempt employees by hours worked. It is essential to communicate this information clearly upfront in the employee handbook or employment agreement.

If you are looking for support in tracking PTO for your employees, taxes, workers’ comp, and more, consider partnering with ConnectPay for all your payroll needs. Schedule a call with a payroll expert to see how ConnectPay can simplify your payroll processes!

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Published by ConnectPay December 1, 2021