How to account for PTO in payroll

What does PTO mean, and how does it affect payroll? The answer is something that every business owner and People Ops professional needs to understand.

PTO, or paid time off, refers to hours or days an employee can use to cover time away from work for planned vacations, medical appointments, sick days, and more. As the name indicates, it's a benefit that results in the employee being paid even though they're not working—a significant cost for employers. According to the U.S. Bureau of Labor Statistics, paid leave benefits represent 7.4 percent of total compensation, averaging $2.94 per hour worked in September 2022. There's no distinction between vacation days, sick days, and personal days. Instead, any time off—regardless of the reason—fits into this category.

Here's what you need to know about implementing a PTO policy and accounting for it.

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Types of PTO Systems and How They Work

What are the main types of PTO systems? Most companies choose between three approaches: accrued PTO, lump-sum PTO, and unlimited PTO.

• Accrued PTO: Team Members earn PTO over time based on hours worked or pay periods. This is the most common method, as it rewards tenure and ensures fairness.
• Lump-sum PTO: Often called a PTO bank, this system gives employees a set number of hours or days at the start of the year. It's simple to administer but can be less flexible.
• Unlimited PTO: This approach offers flexibility by not setting a formal cap on time off. While it eliminates the need to track accruals, it requires strong communication and performance management to work effectively.

How to Calculate PTO Accrual Rates

How do you actually calculate PTO accrual rates? The calculation method depends on your pay schedule, but here are the two most common approaches:

Per Pay Period:

This works best for salaried employees with consistent schedules:

• Formula: Total annual PTO hours ÷ Number of pay periods
• Example: 120 annual PTO hours ÷ 26 bi-weekly pay periods = 4.61 hours earned per period

Per Hour Worked:

This approach works better for hourly or part-time employees:

• Formula: Total annual PTO hours ÷ Total work hours per year (usually 2,080)
• Example: 80 annual PTO hours ÷ 2,080 work hours = 0.038 hours earned per hour worked

How does PTO factor into payroll?

Offering PTO is just the first step. You also need to understand how it impacts your payroll process. Before diving into calculations, define how employees receive their paid time off:

• Accrued PTO: Employees accumulate days off over time, such as a set number of hours per pay period.
• Unlimited PTO: A growing trend where employees can take off as much time as they want as long as it doesn't interfere with their work.
• PTO bank: Employees receive a set number of PTO hours, which resets on a predetermined day every year .

In addition to PTO, there are other types of time off companies offer. Some are required by law, such as leave taken under the Family and Medical Leave Act (FMLA), which has had a measurable impact on leave patterns. For instance, since the FMLA was enacted, the share of new dads taking unpaid leave has nearly quadrupled. Others, like jury duty and bereavement, are voluntarily provided by employers and may be counted separately from PTO. No matter how you arrange these benefits, you must create a system that accounts for them to ensure adequate coverage.

Tracking and Recording PTO in Your Payroll System

Think of tracking as the bridge between your PTO policy and actual payroll. Without it, you're looking at incorrect pay and compliance headaches. Your system needs to handle:

• PTO requests are formally submitted and approved.
• Used PTO hours are correctly deducted from an employee's balance.
• Accrued PTO hours are added to the balance each pay period.
• The remaining PTO balance is clearly visible to both the employee and the payroll manager.

Spreadsheets might work for tiny teams, but they break down fast. A dedicated payroll platform automates the heavy lifting and keeps balances accurate.

Legal and Compliance Considerations

PTO policies are not just an internal matter—they are governed by local labor laws, and their financial impact can vary significantly across the workforce. For instance, costs for paid leave benefits average just $0.86 per hour for service workers but jump to $7.50 for management, business, and financial workers. These policies must still adhere to rules that dictate accrual, carryover, and payout. When accounting for PTO in payroll, you must be aware of:

• Mandatory leave: Some jurisdictions mandate minimum paid sick leave or vacation time.
• Accrual caps: Laws may limit how much PTO an employee can accrue.
• Carryover rules: Regulations often specify whether unused PTO must roll over to the next year.
• Payout on termination: In many places, accrued, unused PTO is considered earned wages and must be paid out when an employee leaves the company. Failing to do so can lead to significant penalties.

PTO processes to be aware of

As a People Ops professional, you can take steps to make your time-off process easier for everyone, including:

• Pre-loading holidays: Schedule holiday pay in advance so you don't have to do this multiple times throughout the year.
• Being mindful of floating holidays: If your company provides floating holidays, be aware that these can be used by employees at different times.
• Communicating blackout dates: There may be times throughout the year when you don't want certain teams or individual employees taking PTO. For instance, the end of the fiscal year is not a good time for a key accounting employee to request time off.
• Having a system for tracking PTO: A PTO spreadsheet helps reduce friction when requesting, approving, and managing paid time off.

Implementing the right PTO processes upfront will save you time, money, and headaches down the road.

Managing PTO Across Global Teams

Global teams? That's where PTO management gets tricky. Each country has different leave laws, holidays, and expectations—so your standard policy won't cut it.

To stay compliant, you need a system that can handle country-specific rules for vacation, sick leave, and other time-off types. This is where a global employment platform becomes essential. It helps you automate compliance and ensure every Team Member receives the correct, locally relevant benefits without creating extra work for your People Ops team.

Streamline PTO Management With the Right Tools

There's no room for error when managing employees' time off. One slip-up can impact a team and an employee's plans and morale. Fortunately, there's plenty of help available.

At Oyster, our global employment platform allows you to efficiently manage global payroll for your entire team. Pay team members, manage paid time off, and maintain compliance no matter where your employees are located.

Other features include:

• Managing invoicing and global payments.
• Paying team members in their local currencies.
• Automatically managing taxes, local deductions, and contributions for all team members.

Are you ready to take full advantage of these features? Register for an account today. It won't be long before you have everything you need to manage the ins and outs of PTO, and all other aspects of payroll.

About Oyster

Oyster is a global employment platform designed to enable visionary HR leaders to find, engage, pay, manage, develop, and take care of a thriving distributed workforce. Oyster lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.

Oyster enables hiring anywhere in the world—with reliable, compliant payroll, and great local benefits and perks.