Vacation pay can be handled in three ways:
Employees are paid their regular wages when they take vacation time.
This method requires no specific setup under payroll. The disadvantages are:
There is no tracking of the employer's liability for vacation pay kept in the books.
There is no tracking of an individual employees vacation pay entitlement.
Vacation pay is paid at a specified percentage on each paycheck.
Advantages:
Simpler payroll setup. All that is required is one earnings account per employee.
The employer does not have a vacation pay liability carried on the balance sheet.
When an employee leaves, there are no special calculations required to determine vacation pay.
Disadvantages:
The vacation pay paid on each check reduces the amount of cash available for other activities.
Employer payroll contribution expenses are increased slightly every pay period, instead of only when an employee takes vacation or leaves the company.
Vacation pay is accrued.
Advantages:
The employer's vacation pay liability is correctly shown on the balance sheet (without having to make manual accrual calculations, entries and reversals.)
Up-to-date information on individual employee's vacation pay liabilities are always available.
Disadvantages:
More complicated employee account setup.
An earnings account is added to the employee's accounts as follows:
In the Employees window (top pane), activate the employee for which the earnings account is to be added.
In the Accounts window (middle pane), issue the command Edit>Insert to insert the account below the earnings account(s) that vacation pay is payable on, and above the deductions accounts that are based on wages.
Enter the account name in the Name field and the account description in the Description field. Enter debit (press <F3> to select) in the Normal Balance field.
Total the account to an appropriate expense account. See Report Arithmetic for more information on totaling).
Enter the following pay codes in the Pay Code window (bottom pane):
Tax Treatment: Regular Wages
Percent: The rate at which vacation pay is payable (usually 4%)
When paychecks are processed, the specified percentage of earnings will be added to the check.
Three accounts are added to the employee's accounts:
An earnings account to record the vacation pay earned.
An earnings account to record vacation pay paid out.
A deductions account to record vacation pay withheld.
four accounts are added to the employee's accounts:
A wages payable "=" earnings account to record the vacation pay earned.
A wages paid "-"earnings account to record the vacation pay earned.
An earnings account to record vacation pay paid out.
A deductions account to record vacation pay withheld.
When paychecks are posted, the amount of vacation pay earned (e.g. 4% of wages) is debited to the paid account, and credited to the accrued account. The debit increases the net paycheck and your payroll expenses. The credit decreases the net paycheck and increases the (credit) balance of your vacation pay liability account.
When vacation pay is paid out, the debit is posted to the paid account. The debit increases the net paycheck, and increases the (debit) balance of your vacation pay remitted account.
The net difference between the vacation pay liability account and the vacation pay remitted account is your net liability for unpaid employee vacation pay.
This is a debit normal-balance account that totals to a payroll expense account.
When paychecks are posted, the calculated vacation pay is debited to this account, which increases the net amount of the paycheck. (The amount is deducted back off the check by a later posting to the employee's vacation pay withheld account.)
The amount is not taxable, and does not appear on T4 & Releve 1 slips.
The paycodes would be set as follows:
Type: Vacation Pay Earned
Percent: The percentage of earnings you pay vacation pay at.
T4/Releve 1 Boxes: Blank
Subject to EI, CPP, Tax, etc.: No
This is a debit normal-balance account that totals to the Vacation Pay Remitted account on the Payroll Withholdings report.
This account is debited when accumulated vacation pay is paid out. The amount is taxable, and appears on T4 & Releve 1 slips.
The paycodes would be set as follows:
Type: Vacation Pay Paid
Time/Quantity: Blank
T4 Box: 14
Releve 1 Box: A
Subject to EI, CPP, Tax, etc.: Yes
This is a credit normal-balance account that totals to the Vacation Pay Withheld account on the Payroll Withholdings report.
When paychecks are posted, the calculated vacation pay is credited to this account, which reduces the net amount of the employee's paycheck. This is the reverse of the employee's vacation pay earned account.
The amount accrued does not reduce taxable income, and does not appear on T4 & Releve 1 slips.
The paycodes would be set as follows:
Type: Vacation Pay Withheld
Percent: The percentage of earnings you pay vacation pay at.
T4/Releve 1 Boxes: Blank
Reduces EI, CPP, Tax, etc.: No
Vacation pay can be paid by two different methods from the Pay Codes Window of the employee Vacation Pay Paid Account. These are listed below:
Enter the word ALL in the Rate field. This will cause all unpaid vacation pay will be paid out on the next check. (Including any vacation pay earned on normal wages on that check.)
Enter the amount you wish to pay out on the next paycheck. You can also set the rate to zero. Setting the rate to zero will allow you to manually enter the vacation paid amount in the paylist window.
Note: Payroll will not pay out a vacation pay amount that is greater than the difference between the employee's vacation pay earned and accrued accounts.