Vacation Pay - The Ins and Outs

1. Apply all withholding taxes to vacation pay.

2. You can accrue paid vacation differently by the job, because it is a matter of company policy, not federal law. For example, give managers two days' paid vacation for each month worked, a clerk one or no days. Or, base paid vacation on salary, years worked or a mix of standards. But the policy should be in writing, made known to employees and applied consistently.

3. You need not include paid vacation days in overtime calculations. For example, if an employee works 40 hours, Monday-Thursday and takes a paid vacation day on Friday, you need not include the paid Friday hours when determining whether the employee is entitled to overtime pay.

4. If vacation pay is included in a normal paycheck, withhold for the entire check over a longer period. For example, if you pay weekly and include one week’s paid vacation, withhold for a two-week period.

5. You must pay earned or accrued vacation if the employee quits. Have a written policy that clearly states who is or is not entitled to accrued vacation pay at termination. Reminder: Employees may be entitled to unused vacation pay under ERISA (covers early retirement) if there is a written policy or a pattern or practice of paying unused accrued vacation to such employees.

Important: These are the rules under federal law. Where appropriate, also check your state laws.