Year-End 2026 Reminder: Don't Overlook Your PTO Accruals

As 2026 winds down, unused paid time off (PTO) deserves a spot on your year-end close checklist. Many employers let employees carry forward vacation, sick leave or personal time, and those balances can create a liability under U.S. Generally Accepted Accounting Principles (GAAP). If your team banked more time off than usual this year, your accrual may be larger than you expect.

What PTO Represents on the Balance Sheet

Compensated absences are time off that employees have earned but not yet taken, including:

• Paid vacation
• Paid holidays
• Paid sick leave
• Other PTO earned through employment

When unused time carries forward or must be paid out at termination, your company generally needs to record a liability for the compensation it owes.

When to Record the Liability

Start with your written PTO policy and the laws in each state where you have employees. Some states restrict use-it-or-lose-it policies or require payout at termination. Under GAAP, record a liability when:

• Employees have already earned the time
• The rights vest or accumulate
• It is probable employees will use or be paid for the time
• The amount can be reasonably estimated

Calculating the Accrual

• Hourly employees: unused hours times the current hourly rate, adjusted for employer payroll taxes and benefits.
• Salaried employees: annual pay converted to a daily or hourly rate, applied to the unused balance.
• Breakage: you may adjust for time employees historically do not use, as long as the estimate is supported by past trends and updated regularly.

Use 2026 pay rates, not last year's. Raises given during the year are one of the most common reasons an accrual comes in low.

The Tax Side

Book and tax treatment often differ. An accrual-basis business can generally deduct vested PTO in 2026 only if it is paid within two and a half months after year end. Amounts paid later are deducted when paid, which is why PTO accruals often create a deferred tax asset on the financial statements.

Be Ready for Your Auditors

PTO is a common area of auditor focus and a frequent year-end adjustment. To keep fieldwork on track:

• Document a clear policy for recording PTO.
• Apply the same calculation method every year.
• Provide a supporting schedule by employee.

More Than an Accounting Entry

Growing PTO balances can also point to burnout, workload pressure or scheduling gaps. Encouraging employees to use their time before year end supports both your people and your balance sheet.

How We Can Help

Getting the PTO estimate right before year end saves time during fieldwork. Our audit and client accounting teams can help you set a clear policy, calculate the accrual and document it for your auditors.

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