Vacation pay rules for employers: accrual, pay-as-you-go and the year-end treatment

Vacation pay looks trivial until an employee leaves with a larger payout than expected. Two rules apply: a provincial one sets how much is owed and when; a federal one sets withholding and reporting. Small employers usually get the first roughly right and the second wrong.

Related: Accounting for hair salons, barbers and spas.

Related: The record of employment — when, how and by when.

Whether you accrue or pay as you go changes the year-end liability on the balance sheet. How payroll is run here, or ask about one employee. Accruing vacation pay assumes the books run on the accrual method; see which accounting method a business can use.

The B.C. minimums, side by side

Vacation time and vacation pay are separate entitlements, which is the distinction this table exists to make: an employee cannot skip the time off and take the money instead. An agreement that gives more than the minimum is enforceable at the higher figure.

Working out an average day’s pay for a B.C. statutory holiday? The BC stat pay calculator does it, and settles the qualifying test first.

What B.C. requires

Two entitlements run in parallel and they are not the same thing.

Vacation time. Employees earn vacation from their first year: two weeks after 12 months, three weeks after five years. It must be taken within 12 months of being earned, not exchanged for money.

Vacation pay. At least 4% of all wages paid in the previous year, rising to at least 6% once the employee completes five years of employment. Total wages for this purpose include regular wages, salary, commissions, statutory holiday pay, paid sick days required by employment standards, and previously paid vacation pay, which is why the base grows slightly each year.

Employees employed five calendar days or less get no vacation pay. Agreements giving more are enforceable: an offer letter promising three weeks from day one sets your standard.

Accrual versus pay-as-you-go

There are two legitimate ways to run this in B.C.

Under the accrual method, vacation pay builds up as a liability and is paid at least seven days before the employee starts their annual vacation. This is the default. It matches the cash outflow to the time off, and it means the balance sheet carries an accurate picture of what you owe.

Under pay-as-you-go, the 4% or 6% goes on every cheque. B.C. allows this only if the employee and employer agree in writing. It keeps the liability off the books, but the employee must still take the time off after the money is spent, and any shortfall is still settled when employment ends.

Whichever route you choose, apply it consistently and document it. A verbal “it’s included in your rate” is not the written agreement the Act contemplates.

The payroll treatment

This part is federal and applies in every province. Vacation pay is employment income reported in box 14 of the T4 in the year it is received, with EI insurable earnings in box 24 and CPP pensionable earnings in box 26. What changes is how the deductions are calculated:

• Paid while the employee is on vacation leave. CPP contributions and EI premiums are calculated exactly as they would be on regular salary. For income tax, use the table for the vacation period if you pay it separately, or the regular pay period if it goes out with other earnings.
• Paid out without leave, or paid continuously on every cheque. Income tax is calculated using the bonus or irregular payment method, and — the part most often missed — CPP is also calculated using the bonus method. EI premiums are still calculated as for regular salary.

A company car is the most common taxable benefit on a T4; see how the standby charge works.

A wrong method rarely changes the employee’s final tax, but it changes what you remit in the period, and remittance mismatches prompt letters. If unsure, apply the discipline of taxable and non-taxable benefits: characterize the payment first, then withhold.

What to carry at year-end

If you accrue, carry the liability on the balance sheet at fiscal year-end, measured on actual wages paid in the entitlement year. Vacation pay owing differs from vacation time owing; an employee can be current on one and behind on the other. The accrual is real cash, so plan it alongside your source deduction remittances.

Under pay-as-you-go there is normally nothing to accrue, but you should still be able to show, employee by employee, that the percentage actually went out on every cheque. That reconciliation is a five-minute job during your payroll year-end checklist and a very unpleasant one two years later.

When employment ends

All remaining vacation pay is owed on the final cheque, with 4% still due to someone who has been there less than a year. That payout lands inside the same 48-hour window as the rest of the final wages. See final pay on termination for the full sequence.

Vacation pay on a Chilliwack trades payroll

Chilliwack trades employers often pay vacation pay on each cheque as crews come and go. BC allows that if agreed and shown separately on the pay statement; the common failure is folding it into the hourly rate with no record. Chilliwack accounting firm for the payroll side.

The bottom line

Choose deliberately between accrual and pay-as-you-go, put pay-as-you-go in writing, use the right deduction method, and carry an honest liability if you accrue. Then vacation pay will not surprise you. Hiring for the first time? Our first-employee checklist sets up the rest of the payroll file.

Running payroll through your own corporation puts you on the other side of these rules. For the version that applies to your company, send the question and a CPA answers it, usually the same business day.

Vacation accrual is the kind of calculation that quietly compounds when it is wrong, which is one reason owners end up having payroll run for you rather than tracking it in a spreadsheet.

Getting the accrual and the withholding right every pay is ordinary payroll and bookkeeping work — the errors compound quietly when it is reconstructed at year-end instead.

This article is general information for Canadian business owners and is current as of July 2026. It is not tax, legal or accounting advice, and your situation is unique, so please speak with a CPA before acting on anything here.

Working through this locally? We advise owners on it as an Abbotsford small business accountant.