Accruals: What It Means for Employers

What it means in practice

Accrual has two meanings in HR and payroll. Leave accrual is how a balance of vacation, sick leave or paid time off builds up, such as a set number of hours per hour worked or per pay period. Accrued payroll is wages employees have earned for work already done but have not yet been paid, which the employer carries as a liability until payday. For the taxes and deductions that follow a paycheck, see payroll liabilities.

The federal baseline for leave accrual. The Department of Labor says the FLSA "does not require payment for time not worked, such as vacations, sick leave or federal or other holidays," and that these benefits are matters of agreement between employer and employee. Its sick leave page says "there are no federal legal requirements for paid sick leave," although the Family and Medical Leave Act requires unpaid leave for covered employers. On covered Service Contract Act contracts, holiday and vacation requirements appear in the wage determinations, and under the Davis-Bacon and Related Acts vacation pay is required only if the wage determination specifies it. Otherwise, whether leave accrues, at what rate and with what cap is set by employer policy and by state or local law.

Common accrual methods. Leave can accrue per block of hours worked, such as 1 hour per 30; per week or pay period, as in the California Labor Commissioner's example of 80 hours a year divided by 52 weeks, or 1.538 hours a week; or it can be front-loaded, with the full annual amount available at the start of the year. Both 29 CFR 13.5 and California's paid sick leave FAQ allow front-loading as an alternative to accrual.

Federal contractors under Executive Order 13706. DOL Fact Sheet #84 (January 2025) says the order applies to contracts resulting from solicitations issued on or after January 1, 2017. Under 29 CFR 13.3, it covers construction contracts under the Davis-Bacon Act, service contracts under the Service Contract Act, concessions contracts, and certain contracts in connection with federal property or lands, but not contracts to manufacture or furnish materials, supplies or equipment. Employees exempt from FLSA minimum wage and overtime are covered too. As of October 2026 the eCFR still carries part 13, and Executive Order 14236 (March 2025), which revoked the separate contractor minimum wage order, Executive Order 14026, does not list Executive Order 13706.

How contractor accrual works. Under 29 CFR 13.5, employees accrue not less than 1 hour of paid sick leave for every 30 hours worked on or in connection with covered contracts, adding together hours across all of the contractor's covered contracts. Hours worked has its FLSA meaning (29 CFR part 785; see hours worked). Accrual must be calculated at least at the end of each pay period or each month, whichever is shorter. Leave need not be credited in increments smaller than 1 hour, but leftover hours roll forward within the same accrual year. For an exempt employee whose hours the contractor is not required to record, it may track actual hours or assume 40 covered hours per workweek.

Caps, carryover and notices. A contractor may cap accrual at not less than 56 hours per accrual year, a 12-month period it chooses and applies consistently. Unused leave must carry over, and the balance available for use may be capped at not less than 56 hours. Instead of accrual, the contractor may front-load at least 56 hours each accrual year, prorated by remaining pay periods for a mid-year hire. Employees must get a written statement of their balance at least each pay period or month, whichever is shorter, and at separation. No cash-out is required at separation, but leave must be reinstated for an employee rehired within 12 months unless it was paid out at full value. Records must be kept for at least 3 years after the contract (29 CFR 13.25).

Worked example 1: contractor sick leave. A Remindax illustration with assumed hours. An employee works 40 covered hours in her first weekly pay period. As DOL's FAQ explains, the first 30 hours earn 1 hour of paid sick leave and the other 10 count toward the next 30. In week two, 10 carried plus 40 is 50 hours, earning 1 more hour with 20 left over. In week three, 20 plus 40 is 60 hours, earning 2 hours. After 120 hours she has 4 hours accrued (120 / 30). Reaching a 56-hour cap takes 1,680 covered hours (56 x 30). An exempt employee under the 40-hour assumption accrues 5 hours over four weeks (160 / 30, with 10 hours carried forward).

Accrual during FMLA leave. Under 29 CFR 825.215(d)(2), an employee "may, but is not entitled to, accrue any additional benefits or seniority during unpaid FMLA leave." Paid leave already accrued when leave began, to the extent not substituted for FMLA leave, must be available on return. See the FMLA page for substituting accrued paid leave.

Paying out accrued leave. Publication 15 (2026) says vacation pay is subject to withholding as if it were a regular wage payment, but when it is in addition to regular wages, such as an annual lump-sum payment for unused vacation, it is a supplemental wage payment; payments for accumulated sick leave are also supplemental wages. For 2026, the optional flat federal income tax withholding rate on supplemental wages is 22%, or 37% on amounts over $1 million paid to an employee in the year; see supplemental wages. Under 29 CFR 778.219, pay for unused leave may be excluded from the regular rate and may not be credited toward overtime due.

Accrued payroll: wages earned but not yet paid. Federal employment taxes key on payment, not accrual. Income tax is withheld "as and when paid, either actually or constructively" (26 CFR 31.3402(a)-1), and for Social Security and Medicare, wages are paid when "actually or constructively paid" (26 CFR 31.3121(a)-2). Wages are constructively paid when credited to or set apart for an employee without substantial limitation, so the employee can draw on them at any time. Publication 15 adds that deposit rules use the dates wages are paid.

Year-end cutoffs and Form W-2. The 2026 General Instructions for Forms W-2 and W-3 say W-2 entries "must be based on wages paid during the calendar year." Their example: if an employee worked from December 13 through December 26, 2026, and was paid for that period on January 1, 2027, those wages go on the 2027 Form W-2. The employer may carry those wages as an accrued expense on its 2026 books, but the payroll tax year follows the payment date.

When the employer deducts accrued wages. Under 26 CFR 1.461-1(a)(1), a cash-method taxpayer generally deducts expenses in the year paid. Under 1.461-1(a)(2), an accrual-method taxpayer takes a liability into account when all events establishing it have occurred, the amount can be determined with reasonable accuracy, and economic performance has occurred. For services provided to the taxpayer, economic performance occurs as the services are provided (26 CFR 1.461-4(d)(2)(i)); IRS Publication 538 (Rev. January 2022) says it "occurs as an employee renders service to the employer."

The 2 1/2 month rule. Deferred compensation is deductible in the employer's tax year in which it is includible in the employee's income, and no amount is treated as paid until the employee actually receives it (26 U.S.C. 404(a)(5) and (a)(11)). Under 26 CFR 1.404(b)-1T, compensation is presumed deferred to the extent it is received after the 15th day of the 3rd calendar month after the end of the employer's tax year in which the services were performed: March 15 for a calendar-year employer. The presumption is rebutted only by showing that paying on time was administratively or economically impracticable and that this was unforeseeable at year end. Pub 538 says vested vacation pay can be deducted for the year earned if paid during the year or within 2 1/2 months after it ends, and that amounts owed to a related person who uses the cash method are not deductible until paid. Confirm how these rules apply to your business with a tax professional.

Worked example 2: a year-end payroll accrual. A Remindax illustration with assumed figures. A calendar-year, accrual-method employer pays biweekly. The pay period runs December 20, 2026, through January 2, 2027, gross wages are $14,000, and payday is January 8, 2027. Assuming work is spread evenly over the 14 days, 12 fall in 2026, so the December 31 accrual is $12,000 (12 / 14 x $14,000). For payroll tax purposes the full $14,000 is paid in 2027: income tax and FICA are withheld on January 8, the deposit follows the 2027 schedule, and the wages appear on 2027 W-2s. Because the wages are received before March 15, 2027, the 2026 portion is not presumed to be deferred compensation under 26 CFR 1.404(b)-1T.

Where states differ. Many states and some cities set their own accrual rules; the two below are examples from official pages read for this entry, not a survey. California's paid sick leave FAQ (updated December 31, 2025) covers employees who work at least 30 days for the same employer within a year in California. Under an accrual policy, employees earn at least 1 hour per 30 hours worked; use may be limited to 40 hours or five days a year, and total accrual capped at 80 hours or ten days. Leave may be used after a 90-day employment period, the balance must appear on the pay stub or a document issued the same day, records are kept for three years, and unused sick leave need not be cashed out but is restored on rehire within 12 months.

California vacation accrual. The Labor Commissioner's vacation FAQ says California does not require vacation, but once offered, earned vacation is wages that vests as labor is performed and cannot be forfeited, even at termination. A "use it or lose it" policy is illegal; a reasonable cap on accrual and a genuine waiting period with no accrual are allowed, and combined PTO plans follow the same rules. At separation, unused vacation is prorated daily and paid at the final rate of pay. The FAQ's example: an employee entitled to 120 hours a year who quits on the 219th day of the year has earned 72 hours (219 / 365 = 60% of 120); at a final rate of $13.00, that is $936.00. Vacation taken before it was earned cannot be deducted from the final paycheck.

Worked example 3: Washington's rate. The Washington Department of Labor and Industries says employees earn at least 1 hour of paid sick leave per 40 hours worked, regardless of full-time, part-time, temporary or seasonal status; may use it beginning 90 calendar days after starting; and must have balances of 40 hours or less carried over. Balances generally need not be paid at separation unless another state law or a collective bargaining agreement requires it. As an illustration, a part-time employee working 25 hours a week for 52 weeks works 1,300 hours and earns at least 32.5 hours (1,300 / 40). The same hours under a 1-per-30 rule, as in California or for federal contractors, earn about 43.3 hours (1,300 / 30).

FAQ: Does federal law require leave to accrue? Not for most private employers. DOL says the FLSA does not require payment for time not worked; covered federal contractors are the main exception (29 CFR part 13).

FAQ: Must accrued leave be paid out at separation? Not under federal law, and DOL says federal law does not require a former employee's final paycheck immediately. California requires payout of earned vacation; check your state.

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