Definition: Vacation pay is a benefit that employers typically give full-time employees that allows the employees to take a paid vacation. Most full-time jobs start with two weeks paid vacation with the option to earn more throughout years of service.
What Does Vacation Pay Mean?
A common employment arrangement is set up like this. Once an employee is hired, the employee gets two weeks paid vacation but can’t take any of this vacation time until it vests. The vesting period is typically six months to a year. After the vesting period the employee can take a vacation up to two weeks and still be paid as if he was working.
After the first year of service, the employer can examine the employee’s growth and performance record. If approved, the employee can earn an additional paid vacation week after every year of service. So after the employee has worked five years for the employer, he could be eligible to receive six weeks paid vacation.
Every employment contract is different and every employer has their own way of rewarding employees. This is just a typical employment scenario.
Example
Vacation pay is recorded just like any other payroll expense. The salaries expense account is debited for the employee’s pay and the cash account is credited. The employer will also have to pay FICA and FUTA taxes on the employee’s vacation pay. As far as record keeping and accounting goes, vacation pay is recorded exactly like the normal payroll. The only difference is that the employ is not actually working during that period.
