VAcation Pay JE Reminders

Federal law does not require employers to offer vacations—paid or unpaid. It is a matter of company policy and possibly state law. If vacation is offered, paid or unpaid, it should be in writing (e.g., in the employee handbook) so both employer and employees know the rules. 

•   Apply all withholding taxes to vacation pay. For accrued vacation paid in lieu of time off, or included in final wages, you have options:

•   For combined supplemental and regular wages not separately specified, withhold FIT on the total payment.  

•   For supplemental and regular wages paid separately—or in one paycheck but separately specified—withhold normal FIT from regular wages. Then, either:  

1. withhold supplemental pay at 22%; or

2. withhold as if supplemental pay + regular wages for the payroll period is a single payment. To compute: FITW – FIT already withheld on regular pay = remaining FITW.  

Note: If supplemental wages for the year exceed $1 million, withhold FIT at 37%. See IRS Pub. 15A.  

Vacation pay JEs

Here are the JEs for employees who accrue, then receive, paid vacation:

Accrued Vacation Expense           xxx

           Vacation Payable                        xxx

To accrue vacation pay for the period  

Record distribution of vacation pay as follows:  

Vacation Payable                        xxx

Cash                                            xxx

To distribute vacation pay

From AIPB Bookkeeping Tips, Volume 20: Issue 14