Xero - How to Pay Out or Cash In Annual Leave

Mar 10, 2018

How to Pay Out Accrued Unused Annual Leave Any Time in Xero

Sometimes employees accumulate a lot of annual leave and prefer to be paid the money instead of taking a holiday. When this happens, you can “pay out” or “cash in” some of their annual leave in Xero. In this tutorial, I will show you how to pay out some of the accrued annual leave of an employee in Xero’s demo company.

Add a Leave Request

In this tutorial we will allow demo company employee Odette Garrison to cash in seven hours of her annual leave. The first thing we need to do is add a leave request:

  1. Go to Payroll → Employees in the main menu.
  2. Choose Odette Garrison.
  3. Click on the Leave tab. Here, we can see that Odette has 27.0574 hours of annual leave accrued.
  4. Click on New Leave Request.
  5. Populate the fields in the popup box as follows:
    • Type of request: choose Annual Leave
    • Description: type in Cash Out
    • Start Date: select a date about four days before the current date. I have selected 17-July-2018.
    • End Date: make this the same date as the Start Date
    • Hours (the bottom field): type in 7.00
  6. Press Approve when ready.

Odette should now have seven hours of approved leave to take in the pay run that covers the date you entered as the Start Date and End Date.

Set Up the Pay Run

Now we need to process the pay run that will include Odette’s approved annual leave:

  1. Go to Payroll → Pay Employees in the main menu.
  2. Click on + Add Pay Run.

Check and Adjust the Pay Template

Once you have started the pay run you can check to see if Odette’s annual leave payout is included in her pay template:

  1. Click on Odette Garrison to go into her pay template.
  2. Check the earnings section to see if there is 7.00 hours of Annual Leave included.
  3. Check her Annual Leave accrual for this pay run towards the bottom of the pay template. We can see that Odette will have 1.3425 hours to her annual leave balance owing.

At this point, you may need to consider making a PAYG tax adjustment if you are processing an annual leave pay out for a real employee. This is because Xero may not calculate the right amount of PAYG tax on a lump sum annual leave payment. In this tutorial we are not making a tax adjustment, so we can go ahead and finish the exercise.

Post the Pay Run

Once you have adjusted and checked Odette’s numbers, save the pay template and post the pay run. Odette’s annual leave pay out should now be complete and her annual leave balance should have reduced.

We’ll finish the exercise by going to Payroll → Employees → Odette Garrison → Leave and checking her annual leave balance. Here we can see that Odette now has 21.3999 hours of annual leave owed to her. You may recall that before posting the pay run her balance was 27.0574. By subtracting the 7.00 hours of annual leave cashed in and adding the 1.3425 hours she gained through the pay run we get 21.3999, which checks out with the balance in Xero. Success!

How to Pay Out Annual Leave on Final Pay Termination in Xero

When an employee leaves your business you may need to pay out their unused annual leave balance. In this tutorial, I will show you how to cash in the annual leave accrued for an employee in Xero’s demo company.

Set Employee’s Termination Date

The first thing we need to do is set the termination date for your employee:

  1. Go to Payroll → Employees in the main menu.
  2. Choose Odette Garrison.
  3. Click on the Employment tab.
  4. Click on the Options button at the top right hand side of your screen.
  5. Choose Set termination date from the drop down menu. Using the calendar in the Termination date field, choose your employee’s last working day. For the purposes of this tutorial, choose a date about four days ahead of the current date. I have entered 17-July-2018.
  6. Press Save when ready.

Set Leave to be Paid Out on Termination

Next, we need to set Odette’s employee profile up so her annual leave will be paid out on termination:

  1. Click on the Leave tab.
  2. Click on the number of Annual Leave hours accrued.
  3. In the popup box, go to the On termination unused balance is: field and choose Paid Out.
  4. Click on Save when finished.

Choose the Pay Run

Now we need to process the pay run that will include Odette’s final pay:

  1. Go to Payroll → Pay Employees in the main menu.
  2. Click on + Add Pay Run.
  3. Select the pay run that will include Odette’s final pay. 

Set up the Pay Template

Once you have started the pay run you must set up Odette’s pay template to include her annual leave pay out:

  1. Click on Odette Garrison to go into her pay template. At this point her annual leave pay out will not be included.
  2. Scroll to the bottom of the template and click on Set as Final Pay.
  3. In the popup box, choose the correct Termination date which in this case is 17-July-2018.
  4. There are other options that you can change if appropriate for your employee, but for this exercise we will leave them as they are so press Save when ready.

Check the Pay Template

Once you have completed the steps above you should see a message at the top of Odette’s pay template and few more pay lines:

  • Leave Type: Annual Leave (Final Pay).
  • Tax Type: tax on unused leave.

Now save the template and post the pay run to complete Odette’s annual leave pay out. Check that her annual leave balance is nil by going to Payroll → Employees → Odette Garrison → Leave.

How to Cancel a Final Pay

If you have made a mistake or you want to cancel a final pay for any other reason, simply press the Clear Final Pay button at the bottom of the employee’s pay template before you post the pay run.

How to Pay Out Annual Leave After Termination in Xero

If an employee has left your business and you did not pay out their annual leave right away, you can pay it out later in Xero. If you need to, you can pay out part of their annual leave now and pay out more at a later date.

In this tutorial, we will use Xero’s demo company to pay out the annual leave of an employee after their date of termination and presumably after they have received their final regular pay.

Set Employee’s Termination Date

The first thing we need to do is set the termination date for your employee. If you have already done this for your employee you do not need to do it again, but for this exercise we need to set the date as it has not yet been done:

  1. Go to Payroll → Employees in the main menu.
  2. Choose Odette Garrison.
  3. Click on the Employment tab.
  4. Click on the Options button at the top right hand side of your screen.
  5. Choose Set termination date from the drop down menu. Using the calendar in the Termination date field, choose your employee’s last working day. For the purposes of this tutorial, choose a date about four days ahead of the current date. I have entered 17-July-2018.
  6. Press Save when ready.

Set Leave to be Paid Out on Termination

Next, we need to set up Odette’s employee profile so her annual leave will be paid out on termination:

  1. Click on the Leave tab.
  2. Click on the number of Annual Leave hours accrued.
  3. In the popup box, go to the On termination unused balance is: field and choose Paid Out.
  4. Click on Save when finished.

Add a Leave Request

Now we need to add a leave request for the number of hours to pay out. If you like, you can pay out part of the annual leave balance now and pay the rest later if need be. For this exercise, we will pay out the entire annual leave balance accrued:

  1. In the Leave tab click on New Leave Request.
  2. Populate the fields in the popup box as follows:
    • Type of request: choose Annual Leave
    • Description: type in Cash Out
    • Start Date: select a date within the time the employee was still working for you. I have selected 16-July-2018.
    • End Date: make this the same date as the Start Date
    • Hours (the bottom field): type in 27.0574
  3. Press Approve when ready.

Choose the Pay Run

Now we need to process the pay run that will include Odette’s annual leave pay out:

  1. Go to Payroll → Pay Employees in the main menu.
  2. Click on + Add Pay Run.
  3. Choose Unscheduled pay run.
  4. Choose the Weekly calendar.
  5. Select the pay period
  6. Press Next when ready.

Set up the Pay Template

Once you have started the pay run you must remove anything from Odette’s pay template that is not her annual leave pay out. This is because we are assuming she received her final pay in an earlier pay run:

  1. Enable Odette’s pay template by clicking on the Grey Circle under the Included drop down box on the right hand side. A green tick should appear.
  2. Click on Odette Garrison to go into her pay template.
  3. Remove anything that is not Odette’s annual leave pay out:
    • Delete the Ordinary Hours line.
    • Delete any leave accruals in the Leave Type section.
    • Delete any lines in the Superannuation Fund section.
    • Click on + Add Superannuation Line and choose Statutory Rate for the Calculation Type. The pay template will then include a line for superannuation but the amount will be nil.

Odette should now be left with only her annual leave pay out and the PAYG tax payable on the pay out.

Post the Pay Run

Once you have adjusted and checked Odette’s numbers, save the pay template and post the pay run. Odette’s annual leave pay out should now be complete and her annual leave balance should be nil.