Check the rules!

There are rules and regulations relating to the cashing out of annual holidays, so first check with the appropriate regulatory body about the rules that affect you.

A good place to start in Australia is the Fair Work Ombudsman or in New Zealand visit the Employment Relations website.

The steps below describe a general scenario which might not suit your requirements. Always check with an accounting advisor (or the experts on our community forum) to clarify the best solution for your business.

We'll create a pay item for the employee who's cashing out annual holidays. This lets you pay them for the value of the leave they're cashing in.

1. From the Payroll menu, choose Employees.
2. Click the employee's name to open their record.
3. Click the Pay items - earnings & deductions tab.
4. Click the dropdown arrow next to Add earning... and choose + Create new earning.
   
5. Set up the earning:
   1. For the Type, choose Standard earning
   2. Enter a Name for the earning such as "Cashed Out Annual Holidays" (or similar).

   3. If you'd like a different, more personalised, name to show on payslips for this earning, enter a Name for payslip. Otherwise, this can be the same as the Name field.

   4. For the Rate:
      • In Australia, choose Multiplier of normal rate and leave the Multiply by field as 1.00000. This means the cashed out leave will be paid at the employee's regular hourly rate.
      • In New Zealand, choose Per hour and leave the Amount field as 0.00. This lets you specify the amount in the employee's pay.
   5. For the Tax field, choose Taxable. If unsure, check with your accounting advisor or the ATO/IRD.

   6. Select your country-specific options. Here are some guidelines:

      Country	Option	Details
      Australia	Pay super on this earning	Selecting this option means superannuation will be calculated on the cashed out leave payment. Annual holiday payments are typically considered part of ordinary time earnings (OTE) for super guarantee purposes, so you'd usually select this option. See the ATO guidelines for details about what should be included in super calculations.
      	Accrue annual and sick leave on this earning	Selecting this option means annual holidays and sick leave will accrue on the cashed out holiday payment. But with cashed out holidays, because the leave isn't actually taken (it's just paid), typically no leave will accrue. So typically you'd deselect this option, but if unsure, check with the Fair Work Ombudsman or your accounting advisor.
      	ATO reporting category	Select the applicable ATO reporting category. Annual leave is typically reported with Gross Payments, but if you're unsure, check with your accounting advisor or the ATO. Learn more about Assign ATO reporting categories for Single Touch Payroll.
      New Zealand	Exclude CEC	Selecting this option means compulsory employer contributions will be excluded from cashed out annual leave payments. If you're unsure about selecting this option, check with your accounting advisor or visit the IRD website.
      	Exclude from gross earnings for leave calculations	Selecting this option excludes cashed out annual leave payments from leave calculations for Ordinary weekly pay or Average weekly earnings. However, the payments will still be included in the Use Ordinary weekly pay (OWP) formula. Learn more about Leave calculations.
      	Don't accrue annual leave on this pay item	Select this option if you don't want employees to accrue pro-rata annual leave on this pay item. Note that employees with a fixed annual leave entitlement will never accrue leave on pay items.

6. Click Save. The pay item is saved for this employee and will now appear on their next pay. If you like, you can also assign this pay item to other employees who cash out annual holiday.

Here's an Australian example of the pay item setup:
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Because of the way you've paid the employee's cashed out leave, their leave balance won't be reduced.

Here's how to reduce their leave balance manually:

1. From the Payroll menu, choose Employees.
2. Click the employee's name to open their record.
3. Click the Leave tab.
4. Reduce the employee's annual leave balance by the number of hours of cashed in leave.
5. Enter the adjustment in the Available balance adjustment field.
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6. Click Save.

The employee has been paid for their cashed in annual holidays and their leave balance has been reduced accordingly.