How can you build PTO into your payroll when you run it? Learn how paid time off works in the world of automated payroll.
About 82 million workers experience payroll errors. These errors range from not enough tax taken out of paychecks, to being paid too little.
These errors usually aren’t deliberate, they’re because many business owners choose to do payroll themselves and they don’t fully understand the law.
One of the most common issues happens when paid time off is calculated. It’s a difficult thing to do, especially if you’re doing payroll yourself. You don’t want to underpay your employees, nor do you want to run afoul of labor and tax authorities.
Read on to learn how to calculate paid time off and ensure your payroll is accurate every time.
Have a Standard Paid Time Off Policy
Employees have high expectations from their employers. If you want to attract and retain the best talent, you have to offer paid time off. Federal laws don’t require you to provide paid time off, but states are starting to mandate that employees have paid time off.
If you do offer paid time off, you need to have a policy that is clear and spells out everything about PTO: how it accrues, how employees use it, and what happens at the end of the year or when employees leave the company.
At every step, you have to make choices. You may have a policy that automatically awards PTO based on how long someone has worked at your company, for instance: an employee will get 120 hours of PTO after 60 days with the company.
The other option is to have hours accrue based on how many hours an employee works.
You also have to decide what happens to PTO at the end of the year. Do employees lose unused PTO at the end of the year? Does it roll over to the following year? Can they cash out unused PTO?
Your job is to have a clear policy and communicate that policy to your employees. You also have to make sure that your PTO policy complies with all state and federal laws.
Is PTO the Same as Vacation Time?
There are several terms that are used when talking about taking time off from work and still getting paid. There’s paid time off, personal time off, and vacation days.
Essentially, they’re all the same thing. They offer a way for employees to have a work-life balance without getting into financial trouble.
Vacation days are usually reserved for days off for no reason. Employees may want to take that long-awaited trip to Hawaii or take a few long weekends during the year.
Personal time off usually refers to sick days, time off for doctor’s appointments, or to take care of personal business.
Some companies will offer two weeks of vacation time and a week of personal time off. That totals three weeks for employees and gives them the flexibility to take a vacation and still be able to call out sick if needed.
Other companies will lump personal time and vacation time together, which has its pros and cons. For companies, they tend to offer less total time off. Since employees try to have time off for vacations, they’re less likely to take sick days.
Most employees come to work when they’re sick, and 40% will work because they don’t want to take a day off. That can lower the productivity of your entire office.
Calculating Paid Time Off
How do you calculate paid time off? You need to go back and review your policy.
If you reward employees with paid time off based on how much they work. This is an accrual method.
In this example, we’ll say that you offer 3 weeks of paid time off. That’s 15 days or 120 hours for a 40-hour workweek.
Most companies pay every other week, for 26 pay periods a year. For new employees, divide 120 hours by 26. That comes out to 4.62 hours a pay period. For employees that are paid weekly, they have 2.31 hours a pay period.
The other method is to give employees a flat rate PTO once they hit 90 days with the company. In this case, it’s much easier to calculate. If they have 120 hours of PTO, you just subtract the hours they take from their PTO account.
Your policy may reward employees who have been with the company longer. For example, a new employee gets 3 weeks of PTO, and when they hit the 5-year mark with the company, they get another week.
Since you may have varying levels, you have to take this into account when calculating PTO. It’s best to divide an employee’s PTO by the number of pay periods.
Tax Withholdings and PTO
When you have PTO, you have to account or taxes, too. You’re going to treat PTO to the same income taxes that you would as if
However, when you calculate payroll, PTO should show up as a separate line item.
The amount changes if you’re paying out PTO in a lump sum, like in the instance when an employee leaves your organization.
In this case, the IRS looks at this type of payment as supplemental wages. You still have to withhold Medicare and Social Security taxes (7.65%). Supplemental wages are taxed at a flat rate of 22%.
You’ll have to find out what the withholding requirements for your state, too. All of this can be very confusing and leaves a lot of room for error. You’ll want to consider a full-service payroll solution for assistance.
Getting Your Payroll Right
Payroll can be confusing because there are so many components to it. You have to figure out payroll taxes, and paid time off.
It’s important to have a clear policy for paid time off, and you need to have systems in place to calculate paid time off into your payroll.
That leaves little room for error when calculating your payroll, which will keep your employees happy.
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