Paid time off (PTO) might seem like a simple benefit, but for small business owners, it’s one of the trickiest policies to get right. Offer too little, and you risk burnout, turnover, or even legal issues. Offer too much without structure, and you’ll end up buried in last-minute requests and payroll headaches.
With more than 33 million small businesses employing 61.7 million people in the U.S., understanding how PTO works and how to manage it well is essential. A clear PTO policy protects your business, supports your team, and gives you back control over scheduling and compliance.
In this guide, I’ll walk you through everything you need to know about PTO, including:
Let’s start with the basics, what PTO really means, and why it matters more than ever.
As previously mentioned, PTO stands for paid time off, though, in some contexts, it may also refer to personal time off. +er way, it means time away from work that your employees are still paid for. That could include vacation, sick leave, mental health days, or personal reasons.
In the U.S., there’s no federal requirement to offer PTO, but many states and cities have their own laws around sick leave, PTO payouts, or accrual requirements. Even when not required by law, offering PTO is one of the most effective ways to attract and retain reliable employees.
Some businesses separate vacation and sick time, while others combine both into a single bank of PTO. While both models give employees access to paid leave, how that time is categorized can affect everything from tracking to employee trust and culture.
Let’s say your employee, Sarah, has a family emergency. In a traditional setup, she would need to use sick leave. The time would be deducted from her sick leave balance, so if she needed additional time later for illness, she’d have fewer hours left. However, her vacation time would remain untouched.
On the other hand, if your company uses a PTO bank, Sarah can simply use available PTO; there is no need to explain, categorize, or worry about which balance it affects. She gets the flexibility to handle what’s happening in her life, and you avoid micromanaging how time off is used.
For small teams, that flexibility can go a long way in building trust and reducing administrative headaches. Just make sure your policy clearly outlines how PTO is earned, tracked, and approved. Tools like OnTheClock PTO tracker make this even easier by letting you customize PTO categories to fit your business’s needs, whether you track sick time separately or keep everything in one bank.
While every employee has different needs, there are some common ways PTO gets used across industries, regardless of how the policy is structured:
As a small business owner, understanding the different types of PTO helps you decide what to include in your policy and how to support your team while staying compliant.
Here are the most common types of PTO you might offer:
Vacation days are PTO days employees use for rest, travel, or personal enjoyment. This time is usually scheduled in advance and approved by a manager to ensure coverage.
Some businesses offer vacation time as a fixed annual amount, while others let it accrue gradually based on hours worked or time employed. Either method works, as long as your policy is clear and applied consistently.
OnTheClock makes this easy by allowing you to set up vacation time as either an accrual-based system or a fixed allotment, depending on what fits your business best.
Sick leave is PTO employees use when they’re ill, injured, or attending medical appointments. It may also cover caring for a sick child or dependent, depending on how the policy is written.
Some states require employers to offer a minimum amount of paid sick leave, even if the company already provides general PTO. These laws often define how sick time accrues, when it can be used, and whether unused hours carry over.
For example, California requires employers to provide at least 40 hours (five days) of paid sick leave per year. Accrual must be at least one hour per 30 hours worked, though employers using a front-loaded or unlimited plan can satisfy the requirement without accrual tracking.
If you choose to separate sick leave from vacation time, make sure your policy clearly explains:
Personal days are PTO days employees can use for personal needs that don’t fall under illness or vacation, such as attending a legal appointment, handling a family matter, or taking a mental health day. They’re typically planned in advance and don’t require medical documentation.
Holidays are paid days off that align with national, religious, or cultural observances. Common examples include New Year’s Day, Independence Day, Thanksgiving, and Christmas.
Some holidays are recognized by federal or state law, especially for government offices and public institutions. However, private employers are not required to offer paid holidays, unless state law or a union agreement says otherwise.
In most cases, employers decide which holidays to offer. Many follow the federal holiday calendar but may adjust based on business needs. Some also offer floating holidays that employees can use for religious or personal observances.
If your business stays open during the holidays, you have a few options:
Beyond vacation, sick time, and personal days, there are several other types of PTO that small businesses may want to include, or at least account for, in their policy. Some of these are required by law in certain states or under specific circumstances; others are optional, but appreciated by employees.
Here are some additional PTO types worth considering:
While not a separate type of PTO, unlimited PTO is a policy approach where employees are not given a fixed number of paid days off. Instead, they’re trusted to take time off as needed, typically with manager approval and within reason.
This model is designed to provide maximum flexibility, reduce burnout, and eliminate the need to track accrued hours or unused balances. But it only works well under certain conditions.
Unlimited PTO works best when:
Potential downsides include:
If you're considering this model, be sure your policy still accounts for legal requirements, clear approval processes, and consistent documentation.
PTO is also a legal responsibility. While there’s no federal law requiring private employers to offer PTO, some states and cities do have specific mandates around certain types of paid leave.
Understanding what’s required (and what’s optional) is key to keeping your policy compliant and your business protected.
As mentioned earlier, private employers are not required by federal law to offer paid vacation, sick leave, general PTO, or paid holidays. These benefits are voluntary, unless required by a contract or collective bargaining agreement.
That said, federal law does require certain unpaid leave protections. Under the Family and Medical Leave Act (FMLA), businesses with 50 or more employees must provide up to 12 weeks of unpaid, job-protected leave for qualifying events, such as a serious health condition, childbirth, or caring for a family member.
During FMLA leave, employees can choose (or may be required) to substitute accrued PTO, like vacation or sick time, to receive pay. However, the leave itself is still unpaid by law.
In summary, federal law:
Unlike federal law, many states and cities have specific laws requiring employers to provide certain types of paid leave, especially paid sick time, or to pay out unused PTO when an employee leaves the company.
State laws vary, but most fall into three categories:
Some states require employers to provide a minimum number of paid sick days, often with specific accrual rates and carryover rules.
For example:
Even cities like San Francisco, Seattle, and Chicago have local sick leave rules that apply to small businesses.
Some states require employers to pay out unused PTO (especially vacation time) when an employee quits, retires, or is terminated. Others leave it up to company policy, as long as it’s written and clearly communicated.
States that require PTO payouts include:
States that allow employers not to pay out unused PTO, as long as it’s stated in your policy, include:
Some states now require employers to provide general-purpose paid leave that employees can use for any reason, not just sickness. For example:
If your business operates in multiple states or even just one with strong labor laws, you’ll need to customize your PTO policy to stay compliant. This includes how leave is:
While PTO is typically optional, some types of leave are protected by law, even if they’re unpaid. The most common example is the FMLA, which applies to businesses with 50 or more employees.
FMLA requires eligible employers to provide up to 12 weeks of job-protected, unpaid leave for events like the birth of a child, a serious health condition, or caring for a sick family member. Employees can choose to use accrued PTO, like vacation or sick time, during this period. In fact, many businesses require it, so employees don’t go entirely unpaid.
Other types of protected leave include military leave (under USERRA), jury duty, or state-level family and medical leave programs. Many states go beyond the FMLA by requiring paid leave or expanding eligibility to smaller businesses. For example, California, New York, and Washington all offer paid family leave benefits, even for companies with fewer than 50 employees.
If you offer PTO, it’s essential to clarify in your policy how it interacts with these types of legally protected leave, whether employees are required to use their PTO, and how leave requests are tracked.
Offering the right amount of paid time off (PTO) isn’t just about checking a box. It’s about protecting your team from burnout, staying competitive in the job market, and supporting long-term retention.
If you're hiring in the private sector, a strong PTO package typically includes at least seven days of sick leave and 10-13 vacation days. Most businesses also offer PTO for major holidays like New Year’s Day, Memorial Day, Independence Day, Labor Day, Thanksgiving, and Christmas. In fact, 94%-96% of private-sector companies cover those six holidays.
To go above and beyond, many small businesses also include all 11 federal holidays or offer one or two floating holidays that employees can use for religious or personal observances.
Public sector PTO is typically more generous. Federal employees start with 13 days of paid vacation and 13 days of sick leave per year. Vacation accrual increases with tenure, which gives long-term employees more flexibility. Some state and local governments offer even more.
For private businesses, PTO can vary by industry, role, and company size. According to the U.S. Bureau of Labor Statistics:
If you're looking to attract and retain top talent, matching or exceeding these averages can give you an edge. You don’t have to match the public sector, but falling too far behind puts your business at a disadvantage, especially when job seekers compare benefits.
Offering PTO isn’t just the “nice” thing to do; it’s one of the smartest decisions you can make as a small business owner. When structured clearly, it saves you money, protects your team, and gives you more control over your schedule.
Here’s why a solid PTO policy actually makes your life easier:
When employees have time to unplug, they come back sharper. PTO gives your team a chance to reset, mentally and physically, which leads to better focus, fewer mistakes, and more consistent performance.
In tight labor markets, benefits matter, especially for small businesses competing with larger employers. A transparent, flexible PTO policy helps you attract better candidates and stand out as an employer who respects work-life balance.
If you offer even one extra day off or a simple approval process, that could be the reason someone chooses your company over another.
When employees know they can take time off without guilt or financial worry, they’re less likely to burn out and more likely to stay. A solid PTO policy shows your team that you respect their time and well-being, which builds loyalty and trust.
Even just a few extra days a year can make the difference between a staff member sticking around or job hunting.
Even with the best intentions, many small businesses run into problems when managing PTO. From policy gaps to tracking issues, these mistakes don’t just frustrate employees; they create legal, financial, and operational risk. Here's where things often break down:
When PTO policies aren’t enforced consistently, employees notice, and it erodes trust fast. If one team member gets last-minute time off approved while another is denied for the same request, it feels unfair. That perception can quickly turn into resentment or disengagement.
For example, let’s say your written policy requires two weeks’ notice for vacation. If one employee routinely gets time off with 24 hours’ notice, others may feel the rules don’t matter or, worse, that favoritism is at play.
Using spreadsheets or paper forms to track PTO might work when you only have a few employees, but as your team grows, so do the chances for costly mistakes.
Common issues include:
These errors not only frustrate employees but can also lead to compliance risks and payroll disputes. For example, if your records show that an employee has eight hours of PTO left, but they’ve actually earned 16, they may accuse you of withholding benefits or mismanaging time off.
Automated time tracking tools like OnTheClock eliminate these issues by:
PTO accrual mistakes are one of the most common and costly issues small businesses face. Whether you're using spreadsheets, outdated software, or manual math, even small errors can lead to big problems.
Here’s what can go wrong:
Let’s say your policy grants 1.25 days of PTO per month. If you round that incorrectly or forget to update the rate when an employee hits their two-year mark, he or she could receive either too much or too little PTO, resulting in confusion, frustration, and possible legal exposure.
If employees don’t know how to request time off or when it will be approved, you’re inviting miscommunication, last-minute absences, and team frustration.
Common problems include:
For example, if two employees request the same day off but only one gets it, with no clear reason why, it can create resentment and a perception of favoritism.
Before you set any rules or accrual rates, start with a practical look at what your business and employees actually need.
This step sets the foundation for everything else. A good PTO policy balances compliance, employee well-being, and your operational limits.
Now that you understand your needs, it’s time to decide how you’ll structure time off.
There are three main models to choose from:
When choosing a model, think about your team size, management style, and compliance requirements. For example, unlimited PTO might sound appealing, but it doesn’t fulfill paid sick leave laws in many states unless tracked separately.
Whichever model you choose, write it down clearly and apply it consistently.
Once you’ve picked a model, define who gets PTO and how they earn it.
This step sets the foundation for your policy’s fairness and sustainability. Be clear, consistent, and compliant with any local laws about minimum sick time or required accrual rates.
Even the best PTO policy falls apart without a system for requesting and approving time off.
When the process is easy to follow and transparent, it reduces friction and builds trust. Everyone knows what to expect, which helps avoid last-minute surprises.
Setting boundaries around PTO balances helps you manage staffing, budgeting, and compliance more effectively.
These rules should be clearly communicated to avoid confusion. And if you're using software like OnTheClock, you can automatically track accruals, enforce caps, and display balances to employees in real time.
Even the best PTO policy fails if no one understands it. Clear, consistent communication builds trust, prevents confusion, and ensures your team actually uses their time off appropriately.
When everyone knows how PTO works, it stops being a pain point and starts being a benefit people actually appreciate.
Once your PTO policy is in place, don’t assume it’s set in stone. Great policies evolve with your business, your team, and the law.
A good PTO policy isn’t static. It’s a living system that protects your business, respects your people, and gets better with time.
Overview:
Employees earn paid time off (PTO) gradually based on the number of hours they work. This method works well for businesses that want to reward tenure and maintain control over time-off balances.
Accrual Rate:
Employees accrue one hour of PTO for every 30 hours worked.
Annual Equivalent:
Full-time employees (working 40 hours/week) will earn approximately 69 hours of PTO per year (~8.6 days).
Eligibility:
All full- and part-time employees begin accruing PTO on their first day of employment but are not eligible to use it until after a 90-day probation period.
Carryover:
Employees may carry over up to 40 hours of unused PTO into the following calendar year. Any hours above the cap will be forfeited.
Maximum Accrual Cap:
Employees may accrue up to 120 hours of PTO. Once this cap is reached, no further PTO will accrue until the balance drops below the cap.
Payout on Termination:
Unused, accrued PTO will be paid out at the employee’s current hourly rate upon separation, unless prohibited by state law.
Overview:
Employees receive a fixed amount of PTO at the beginning of each year (or on their anniversary date). This model is easy to manage and provides employees with full access to their time off upfront.
Annual Allotment:
Full-time employees receive 15 days (120 hours) of PTO per year. Part-time employees receive a prorated amount based on their average weekly hours.
Eligibility:
PTO is granted in a lump sum at the start of each calendar year. New hires receive a prorated amount based on their start date.
Carryover:
Employees may carry over up to 40 unused hours into the next calendar year. Any additional unused time is forfeited unless otherwise required by state law.
Usage Rules:
Employees are encouraged to use PTO throughout the year to support work-life balance. Time off must be requested in advance and approved by a manager.
Payout on Termination:
Unused PTO will be paid out upon separation from the company unless otherwise stated by applicable state laws.
Even with a clear PTO policy, you’ll occasionally face tricky situations that don’t fit neatly into your rules. Here’s how to approach the most common ones:
Some businesses restrict time off during peak seasons or holidays.
If you have blackout dates, spell them out in advance and explain why. Make sure to:
If an employee tries to use PTO during a holiday or closure, clarify whether:
Unlimited PTO works best with high trust and strong accountability. If someone is abusing the policy (e.g., frequent short-notice absences or falling behind on work):
A good fix is to require advance notice for non-emergency leave and regular check-ins with managers to prevent burnout or imbalance.
If you’re laying off employees or closing temporarily:
Now that you have a better understanding of what PTO is, how to structure it, and why it matters, let’s talk about how to track it effectively. Without proper tracking, even the best PTO policies can lead to confusion, payroll mistakes, and employee frustration.
Whether you’re running a small team or managing multiple locations, here’s how to do it right:
Relying on spreadsheets or sticky notes might work for a while, but manual tracking almost always leads to mistakes, misunderstandings, and lost time.
A centralized PTO tracking system keeps everything in one place. It helps you:
Tools like OnTheClock allow small businesses to automate PTO tracking with flexible setup and real-time balance summaries, so no one has to guess.
Manually calculating PTO accruals based on hours worked or employee tenure is time-consuming and prone to error. A small mistake in a spreadsheet can lead to payroll disputes, employee frustration, or even compliance issues.
Automating accruals ensures:
OnTheClock lets you customize accrual rules by hours worked, pay period, or annual schedule, and handles the calculations for you. That way, you can focus on running your business, not crunching numbers.
Nothing frustrates employees more than not knowing how much time off they have. When balances are hidden or unclear, it leads to confusion, mistrust, and unnecessary back-and-forth with HR or managers.
Making PTO balances visible helps:
With OnTheClock, employees can view their PTO balances and usage in real time. No need to ask or wait, everything is updated and accessible from their dashboard. That transparency builds trust and saves time.
Even the best PTO policy can fall apart without a clear, consistent approval process. When requests get lost in emails or are approved inconsistently, it leads to frustration, staffing gaps, and conflict.
A strong PTO workflow should:
With OnTheClock, you can automate time-off requests and approvals. Managers get instant notifications, and all requests live in one place, with no lost emails or confusion. It keeps the process fast, fair, and visible for everyone involved.
Picking the right PTO tracker isn’t just about logging days off; it’s about simplifying your entire workflow, keeping your team informed, and avoiding costly errors. Here’s what to look for:
Your system should update balances automatically based on hours worked, tenure, and your PTO policy. That means no more manual math or spreadsheet errors. Real-time visibility also helps employees plan their time off without needing to ask HR.
The best trackers don’t just record time, they manage it. Look for tools that let employees submit requests, managers approve them, and everyone gets notified, all in one place. Bonus points for customizable workflows and calendar views to avoid overlap or understaffing.
Whether your team is remote, hybrid, or on job sites, mobile-friendly tools are a must. Employees should be able to request time off and check their balance from anywhere, and managers should be able to approve it just as easily.
Let your team members check their PTO balances, histories, and status without sending HR another email. You’ll also want admin dashboards with custom reports, so you can monitor trends, spot potential burnout, and audit usage by department or role.
If you’re running a small business, you don’t have time to babysit spreadsheets or chase down time-off requests. That’s why we recommend OnTheClock, because it makes tracking PTO manageable.
Here’s why it works:
In short, if you want fewer headaches and more control, OnTheClock gives you the tools to make your PTO policy actually work, for you and your team.
Explore OnTheClock’s PTO features
PTO might feel like a benefit, but once it’s on the books, it becomes part of your payroll, and that means taxes. Whether your employee is using vacation, sick leave, or personal time, PTO is considered taxable income in most cases.
Here’s what small business owners need to understand:
When an employee takes PTO, he or she still receives his or her normal paycheck. That pay is subject to the same federal income tax, Social Security, and Medicare taxes as if the individual had worked those hours.
If you pay out unused PTO when an employee leaves your company, it’s still taxable. The IRS treats this as supplemental wages, which may be subject to a flat withholding rate (currently 22%) or taxed at your usual rates, depending on your payroll setup.
PTO is a liability on your balance sheet until it's used or paid out. If you let employees accrue PTO over time, you’re essentially building up a future payroll obligation, something your accountant needs to track.
Tracking PTO can get complicated, especially as your team grows. Between keeping up with accruals, balancing workloads, and staying compliant with state laws, it’s easy for things to slip through the cracks. But managing PTO doesn’t have to be stressful.
When you have a system that automates the hard parts, like calculating balances, tracking requests, and syncing with payroll, you get your time back. More importantly, your team gets clarity, trust, and the flexibility it deserves.
That’s why you need a system that helps you stay organized, stay compliant, and supports your team, without adding more to your plate. OnTheClock makes PTO tracking simple, accurate, and stress-free, no matter the size of your business.
Start for free and give your team the confidence to take time off, knowing everything’s covered.
In most cases, no — but it depends on your policy. Once PTO is approved, it's considered a commitment between the employer and the employee. However, in rare situations — like emergencies or staffing shortages — an employer may revoke approval.
If you need to do this, communicate clearly and offer alternative solutions. To avoid issues, set expectations in your PTO policy about when and why changes can be made.
It depends on your company's payout policy. Some companies pay out unused PTO when you leave, while others don’t. If your employer doesn’t pay out unused time, it may be worth using your PTO before resigning. Just make sure to follow proper notice procedures and avoid burning bridges.
Yes. If your employer allows it. Many companies let employees use PTO during their notice period, especially if it’s planned in advance. However, some policies restrict time off once notice is given. Always check your employee handbook or talk to HR before booking time off during your final weeks.
No. PTO is taxed just like regular wages. When you use or cash out PTO, it's treated as regular income by the IRS. That means standard income taxes, Social Security, and Medicare apply.
If a PTO payout looks smaller, it’s often because it’s lumped with your regular paycheck and may push you into a higher withholding bracket temporarily.
Not exactly. Vacation is just one type of PTO. PTO is a broader term that can include vacation days, sick leave, personal days, and more. Some companies separate these into categories; others combine them into one flexible PTO bank. Either approach works, as long as the policy is clearly defined.
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