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Cashing out annual leave is where an employee is paid for annual leave but without taking the time off work.

Check the rules!

There are rules and regulations that govern the cashing out of annual leave, 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 what works best for your business.

To cash out annual leave in MYOB Essentials, create a new pay item for the employee and use it to make the payment. You'll also need to reduce the employee's leave balance by the number of hours they're cashing in.

Let's take you through it.

1. Create a new pay item

We'll create a pay item for the employee who's cashing out annual leave. 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, select Standard earning.
    2. Enter a Name for the earning such as "Cashed Out Annual Leave" (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, select Multiplier of normal rate.
    5. For the Multiply by field, leave this as 1.00000. This means the cashed out leave will be paid at the employee's regular hourly rate
    6. For the Tax field, choose Taxable. If unsure, check with your accounting advisor or the ATO/IRD.
    7. Select your country-specific options. Here are some guidelines:

      AustraliaPay super on this earningSelecting this option means superannuation will be calculated on the cashed out leave payment. Annual leave 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 earningSelecting this option means annual leave and sick leave will accrue on the cashed out leave payment. But with cashed out leave, 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 categorySelect 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 ZealandExclude CECSelecting 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 calculationsSelecting 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.
  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 leave.

Here's an Australian example of the pay item setup:

2. Pay the cashed out leave

You're now ready to pay the employee for their cashed out annual leave.

  1. Go to the Payroll menu and choose Enter Pay.
  2. Choose the pay period and select the employee to be paid.
  3. Click Start Pay Run.
  4. Enter the Hours of annual leave being cashed out. If the pay is only for the cashed out leave, remove all other hours and amounts from the pay.
    Here's an example of 38 hours of annual leave being cashed out on top of a regular 38 hour weekly pay:
  5. Continue processing the pay as normal.

Now that you've paid the cashed out leave, you'll need to reduce the employee's leave balance. See below for instructions.

3. Reduce the employee's leave balance

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.
    • If you're in Australia, reduce the Opening balance.
    • If you're in New Zealand, reduce the Available opening balance.
  5. Click Save.

That's it - you're done! The employee has been paid for their cashed in annual leave and their leave balance has been reduced accordingly.

Unlink the Cashed Out Annual Leave pay item from the employee to stop it appearing on their future pays. Go to Payroll > Employees > click the employee's name > Pay items - earnings & deductions tab > click the ellipsis and unlink the pay item.

Learn more about assigning and unlinking pay items.