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How To Easily & Accurately Process Vacation Pay in QuickBooks Online

In the midst of summer holidays, many companies will be processing that highly-requested vacation pay on their employees’ paycheques. Even though QuickBooks Online has made it easier than ever to handle payroll tasks, processing vacation pay, no matter the software, can still be a bit tricky. In this blog post, we'll walk you through the steps to ensure smooth and accurate processing.

1. Understanding Vacation Pay Laws and Policies

Before you begin processing anyone’s vacation pay, you’ll want to read up on your company’s policies. Is notice required? Will a form need to be completed? Does it require approval? Every company will have different procedures in place. And if there none: now is the time to write up a proper policy.

Vacation pay is also heavily legislated and anything set out by the provincial or federal government will trump any company’s policy. However, many of the requirements around vacation pay are considered bare minimum, and a company may choose to go over and above - also known as providing the greater right or benefit. Be sure to read up on your province’s Employment Standards.

For example, in Ontario, the minimum rate of vacation pay payable to an employee who has worked less than 5 years for the company is 4% (equal to ~2 weeks for a full time employee), and that would be after 12 months of employment. However, most companies will waive this period and allow their employees to take vacation time within the first 12 months.

Be mindful of how much you pay out before an employee accrues, as it can be difficult to recoup any overdrawn vacation pay, depending on your province.

Or as another example: in Ontario, once an employee completes 5 years with a company, the rate is 6%. After that, there are no regulated increases, but many companies will offer 8% or more after 10 years of employment.

We cannot stress enough how important it is to be well versed in payroll legislation. If you’re not a payroll professional, the amount of rules, special circumstances, and exceptions surrounding Canadian payroll can be overwhelming. If you have any questions, you can always reach out to your province’s ESA representatives.

2. Setting Up Vacation Pay in QuickBooks Online

To disburse vacation pay in QuickBooks Online, you must first ensure that vacation pay is set up properly for each employee. The best way to do this is to open each employee’s profile in the Payroll section of QBO. Scroll down to the Vacation Policy module and click Edit if needed. QuickBooks will also allow you to make adjustments here, should you need to correct anybody’s balances.

When you click Edit, you will be able to set your accrual method as well as their rate, and set this as the default for future employees. You should refer to the employee's employment contract to ensure this is done right.

We also recommend pulling an Employee Details report in QuickBooks Online to double check your employees’ hire dates and make changes to their vacation pay rate according to Employment Standards/your company’s policy.

3. Processing Vacation Pay on Employee Paycheques

Once you’ve ensured all balances and accrual methods are correct, you can go on to process your regular payroll. Utilize the column labelled “Vacation Pay” and set your amount to be paid out.

Depending on the method you’ve selected, this could be paid out every period, or expressed as hours (0h), or a dollar value ($0).

Pro tip: Some employees may request their vacation pay on a separate paycheque in the same pay period, in an effort to save on income taxes. We do not advise doing this as the CPP will be incorrect, since software will take into account the annual exemption - which the employee would have received on their other same-period paycheque. You will need to override the deduction in QuickBooks Online with a manual calculation.

4. Accurately Tracking and Recording Vacation Hours

When it comes to tracking vacations, you can consider tracking manually by email requests, automated Google Forms, or a plain old Excel sheet. We’ve found this to be overwhelming on some companies with many employees on payroll, so we recommend an using QuickBooks Time, where employees log their vacation time alongside their regular hours. This can help you keep track of who's on vacation and when - and it syncs right up to your payroll processing, so nothing gets missed.

But before your employees go off on vacation, approval is usually needed for requesting time off. Through the QuickBooks Time app, employees submit a request for time off, and once approved by the payroll manager or other designated person, it gets added to the schedule and your payroll. This way, everyone in the team knows who will be away, and when.

5. Reporting and Reconciling Vacation Pay in QuickBooks Online

Vacation pay is considered a liability in your company’s books. This means you’ll find it on your Balance Sheet when you run your Financial Reports. Depending on the policy you’ve employed, you may want to keep a close eye on this number.

Let’s say your company’s vacation pay policy states that any unused vacation pay is to be paid out at calendar year end. This means when you run your Balance Sheet report as of December 31, the Vacation Pay account should be at $0 as it would have been paid out on the final paycheques of the year.

Some companies would rather roll over vacation pay into the next calendar year - in which case your liability will continue to increase. For cash flow reasons, you should be aware of the vacation payable account balance. This money technically is already earned by and belongs to your employees - the company is merely “holding” the funds.

It’s also worth noting that any employee with any balance is entitled to the entire sum of their accrued vacation should they quit or become terminated, and this could negatively affect your company’s cash flow. And on the other side of the coin, if an employee has overdrawn their vacation pay, it can be quite difficult for your company to recoup that money, and could even require legal action to have it returned.


By following these steps and utilizing the features available in QuickBooks Online's payroll module and QuickBooks Time, you can streamline the process of processing vacation pay and ensure accuracy in your employee's paycheques during the summer holidays.

For help with your company’s payroll or processing vacation pay, you can contact us any time - we’re Certified ProAdvisors who really know our way around Canadian payroll!

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