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How do I cash out annual leave?

Updated

Under certain circumstances, employees may wish to cash out their annual leave balance. In these scenarios, the law is very clear that employees are required to be paid the full amount that they would otherwise have been paid. It is really easy to cash out annual leave and make sure you are meeting your obligations. To cash out annual leave for an employee, follow the below simple steps.

Important

When cashing out annual leave, you are required to pay super contributions as normal. More information on cashing out Annual Leave can be found here.

What you need to do

Step 1: Creating a pay category
  1. Click the   Business Menu.
  2. Click the Payroll Settings submenu.
  3. Under Pay Run Settings, click Pay Categories.

  4. Click Add.

  5. Name the pay category Leave Cash Out.

  6. Set the Units field to Fixed. 

    Important

    If you pay leave loading, you will also need to create a separate or new Leave Cash Out - Leave Loading pay category. This is because you will be manually paying the loading, and you cannot use the "platform" leave loading pay category. Set it up the same way as explained above for Leave Cash Out.

    This way when you include the pay category (Leave Cash Out) in the Pay Run, it will not adjust the normal hours that were worked by the employee cashing out. Cashing out generally does not accrue leave, so setting Units to Fixed does not allow this pay category to accrue leave.

Step 2: Finding the employee
  1. Click the  Pay Runs menu.
  2. Click the regularly scheduled Pay Run.
  3. Find the employee who wants to cash out their leave.
  4. Click on their name to expand the Pay Run record.
Step 3: Applying the leave to the employee's leave balance
  1. After selecting the employee, click Actions.
  2. Click Adjust Leave to create a Leave Adjustment line.
     
  3. Select Annual Leave as the leave category.
  4. In the Hours field, put a minus figure corresponding hours being cashed out. In the image below, we are cashing out 20 hours.
  5. Uncheck the Apply Earnings Rules box.  
  6. Click Save.
Step 4: Inserting an earnings line
  1. Click Actions.
  2. Select Add Lump Sum to create an earnings line.  
  3. Select the Leave Cash Out pay category that was created in Step 1.  

  4. Select the appropriate tax method based on your pay run situation:

    • Method A — Use this if the employee has other ordinary earnings in the same pay run (e.g. their regular salary or wages). Method A spreads the tax across multiple pay periods and requires ordinary earnings to be present in order to calculate PAYG correctly.
    • Method B(ii) — Use this if the leave cash out is the only payment in the pay run, or there are no other ordinary earnings. Method B(ii) calculates PAYG independently and does not require other earnings to be present. See the YourPayroll support article for further guidance on this method.

    Helpful Hint

    If you are unsure which method applies, check whether the employee has regular wages or salary included in this pay run. If yes, use Method A. If the cash out is the only payment, use Method B(ii).

  5. Insert the number of pay periods you want this payment to be spread over. This will adjust the PAYG accordingly. 

    Important

    As leave accrues across the year, you can spread the PAYG tax across the year. Enter the number of pay periods that occur in one year for this employee.

  6. Put the number of hours you entered as a minus in the Leave Adjustment row in Step 3. This time, do not put a minus sign.
  7. Enter the employee's normal hourly pay rate. 

  8. Click Save.
     

    Important

    Method A uses the lump sum payment method to aggregate tax across multiple pay periods, but this only works if there are other ordinary earnings in the pay run. If there are no other ordinary earnings, use Method B(ii) instead, or refer to the Further Information section below.

Step 5: Paying leave loading
  1. If you are paying Leave Loading, follow Steps 1 and 4 again.
  2. Choose Leave Cash Out - Leave Loading as the pay category.
  3. Enter an hourly pay rate that is 17.5% of the employee's normal hourly pay rate. e.g. If their hourly rate is $20, 17.5% = $3.50.

Further information

No other ordinary earnings

If there are no other ordinary earnings to be paid in the Pay Run, use Method B(ii) for tax calculation, or alternatively use Take Leave. If using Take Leave:

  1. Pay the leave out in advance/cash out as you would any other leave.
  2. Manually work out the amount of tax that should be paid.
  3. Use the Adjust PAYG option from the Actions button to adjust the amount of PAYG to be deducted.
  4. Enter a negative adjustment to reduce the automatically calculated amount.

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