To calculate vacation pay, multiply an employee’s accrued vacation hours by their applicable pay rate: the regular hourly wage for hourly workers, or an hourly equivalent derived from the annual salary for salaried workers. The rest of the work is figuring out those two numbers correctly for the specific pay structure, accrual method, and situation (a normal vacation week versus a lump-sum payout at separation).
Before any of this applies, confirm that paid vacation is actually offered. The Fair Labor Standards Act does not require employers to pay for time not worked, including vacation, sick leave, or holidays.1U.S. Department of Labor. Vacation Leave Paid vacation exists because of a written policy, employment contract, or collective bargaining agreement, and the calculation follows whatever that document says about the accrual rate, waiting periods, and carryover.
What You Need Before You Run the Numbers
Every calculation relies on three pieces of information:
- The employee’s pay rate. For hourly workers, this is the hourly wage. For salaried workers, it is an hourly figure derived from the annual salary.
- The accrual method. This tells you how vacation time is earned over time.
- The current vacation balance. This is total hours accrued minus hours already taken.
These figures should appear in the offer letter, the company handbook, or the payroll system. If the employee received a raise, use the current rate rather than the rate in effect when the hours were originally earned.
How the Accrual Method Changes the Balance
Most employers use one of three approaches, and each produces a different balance at any given point in the year.
Under per-hour accrual, the employee earns a fraction of a vacation hour for every hour worked. An employee entitled to 80 hours per year who works 2,080 hours accrues at roughly 0.0385 vacation hours per hour worked (80 ÷ 2,080). After 520 hours worked, that employee has about 20 hours banked.
Under per-pay-period accrual, the annual allotment is divided evenly across pay periods. An employee earning 80 hours per year and paid biweekly (26 pay periods) accrues about 3.08 hours each period.
Under a lump-sum grant, the full annual allotment appears on a set date, often January 1 or the hire anniversary. There is no gradual accumulation.
The method matters most for mid-year events. An employee who leaves in June has earned roughly half the annual allotment under an accrual system, but may have received the entire amount already under a lump-sum grant.
Calculating Vacation Pay for Hourly Employees
Multiply accrued vacation hours by the current hourly rate. A worker who has banked 40 hours and earns $25 per hour has gross vacation pay of $1,000 (40 × $25).
When the vacation is taken during a normal pay period, those vacation hours simply replace work hours on the timesheet, and the paycheck looks the same as any other week. The calculation becomes visible when the payment is separate, such as a year-end cash-out or a final payout at termination, because it appears as its own line item and may be taxed differently.
Because hourly employees often work varying schedules, the balance shifts every paycheck under per-hour accrual. An employee accruing at 0.0385 hours per hour worked who logs 45 hours one week and 30 the next earns different amounts of vacation each week. If you track this manually, update the balance every pay period using: hours worked × accrual rate = new vacation hours earned.
Calculating Vacation Pay for Salaried Employees
Salaried employees have no hourly wage on record, so start by converting the annual salary. The standard divisor is 2,080, which is 40 hours per week times 52 weeks.2U.S. Office of Personnel Management. Computing Hourly Rates of Pay Using the 2087-Hour Divisor An employee earning $60,000 per year has an effective hourly rate of about $28.85 ($60,000 ÷ 2,080).
From there, the math matches the hourly calculation. If that $60,000 employee takes a full week of vacation (40 hours), the vacation pay is roughly $1,154 (40 × $28.85). For most salaried workers, this happens invisibly: the paycheck is the same whether the week was worked or taken as vacation. The conversion becomes important when unused vacation is paid out as a lump sum, because the exact number has to be documented.
Prorating for a Partial Year
An employee who works only part of the year typically earns a prorated share of the annual allotment. Divide the days (or months) worked by the days (or months) in the year, then multiply by the full annual entitlement.
An employee hired on July 1 with a policy granting 80 hours annually has roughly 184 of 365 days remaining, or about 50.4%. That employee would earn approximately 40 hours for the rest of the year (80 × 0.504). A simpler alternative is monthly proration: divide the annual allotment by 12 and grant credit for each full month worked. Either approach is fine as long as it is applied consistently and matches the written policy.
Calculating a Payout of Unused Vacation at Separation
When an employee leaves, calculate how much vacation was earned through the last day worked, subtract any hours already used, and multiply the remaining balance by the final pay rate.
Take an employee earning $30 per hour with an 80-hour annual entitlement who leaves on June 30. About 50% of the year is complete, so the accrual to date is roughly 40 hours. If 16 hours were already taken, the unused balance is 24 hours, and the gross payout is $720 (24 × $30).
One boundary worth noting before running this calculation: federal law does not require an employer to pay out unused vacation at termination.1U.S. Department of Labor. Vacation Leave Roughly 20 states require it by law; the rest defer to the employer’s written policy. If your state does not mandate payout and the handbook says unused hours are forfeited, the calculation may never be needed. Check the state labor department and the company policy before promising a number.
Tax Withholding on the Payment
Vacation pay is subject to the same federal employment taxes as regular wages, including federal income tax, Social Security, and Medicare.3Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide How the income tax portion comes out depends on how the vacation pay is delivered.
If the vacation pay is part of a normal paycheck, such as a week off at regular salary, the IRS treats it as ordinary wages. Federal income tax is withheld using the employee’s W-4 and the standard withholding tables, exactly as with any other paycheck.4Internal Revenue Service. Tax Withholding for Individuals
If the vacation pay is issued as a separate lump sum, such as a termination payout or year-end cash-out, the IRS treats it as a supplemental wage. The employer can withhold federal income tax at a flat 22%. Amounts above $1 million in supplemental wages during the calendar year are withheld at 37%.3Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide Alternatively, the employer can combine the lump sum with the regular wages for that pay period and withhold on the total using the standard W-4 method.
Regardless of the income tax method chosen, Social Security tax applies at 6.2% on earnings up to the 2026 wage base of $184,500, and Medicare tax applies at 1.45% with no wage cap.5Social Security Administration. Contribution and Benefit Base For a $1,200 lump-sum payout, Social Security and Medicare together account for about $91.80 in withholding ($74.40 + $17.40), before any federal or state income tax.
Vacation Hours and Overtime
One point that changes the math for some readers: paid vacation hours do not count as hours worked when calculating overtime under the FLSA.6U.S. Department of Labor. FLSA Hours Worked Advisor – Holidays, Vacations and Sick Leave An employee who takes 8 hours of vacation on Monday and then works 40 hours Tuesday through Saturday has 48 paid hours on the check, but only 40 hours actually worked, so no overtime premium is owed.
Separately, a lump-sum vacation payout can be excluded from the “regular rate” used to compute overtime, but it cannot be credited against overtime the employer already owes.7eCFR. 29 CFR 778.219 – Pay for Forgoing Holidays and Unused Leave The payout is a separate payment, not a substitute for overtime pay.