Managing Vacation Pay

Vacation pay can be handled in three ways:

  1. Employees are paid their regular wages when they take vacation time.

    This method requires no specific setup under payroll. The disadvantages are:

  2. Vacation pay is paid at a specified percentage on each paycheck.

  3. Vacation pay is accrued.

Paying Vacation Pay on Each Paycheck

An earnings account is added to the employee's accounts as follows:

  1. In the Employees window (top pane), activate the employee for which the earnings account is to be added.

  2. 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.

  3. 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.

  4. Total the account to an appropriate expense account. See Report Arithmetic for more information on totaling).

  5. 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%)

Account Setup - Non Timecard employees

Account Setup - TimeCard employees

When paychecks are processed, the specified percentage of earnings will be added to the check.

Accruing Vacation Pay

Account Setup - Non Timecard employees

Three accounts are added to the employee's accounts:

Account Setup - TimeCard employees

four accounts are added to the employee's accounts:

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.

Vacation Pay Earned Account

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:

Vacation Pay Paid Account

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:

Vacation Pay Withheld Account

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:

Paying Vacation Pay

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:

  1. 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.)

  2. 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.


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