How paid leave appears in a pay¶

Most employees can take paid leave — time off work that is still paid. Common kinds are annual leave (holidays) and personal/carer's leave (used when someone is sick or caring for a family member). When an employee takes paid leave, they are paid for that time as part of their normal pay.

This lesson is a high-level look at how paid leave shows up in a pay. The Academy has a dedicated Leave module coming that covers how leave builds up and how much an employee is entitled to. Here we just cover the pay side.

In one line

When an employee takes paid leave, it is paid as part of that pay period's earnings, is taxed like normal pay, and is reported to the ATO separately.

Why this matters¶

When an employee takes a holiday or a sick day, you still pay them. Knowing that paid leave is part of that period's earnings — and is taxed the same way — helps you read a payslip and understand why a pay looks the way it does when someone has taken leave.

What you will learn¶

That paid leave is part of a pay period's earnings
That paid leave is taxed like normal pay
That paid leave is reported to the ATO separately

Understanding the concept¶

When an employee takes paid leave, the hours they are away are still paid. Instead of being paid for hours worked, they are paid for hours of leave. That amount is included in the pay for that period, so it forms part of the employee's earnings.

Because it is earnings, paid leave is taxed like the rest of the pay. The employer takes out PAYG withholding — the tax an employer holds back and sends to the Australian Taxation Office (ATO) — in the same way as for hours worked.

Paid leave is also reported separately to the ATO. Under the current Single Touch Payroll (STP) reporting rules, paid leave is shown as its own line rather than mixed in with the rest of the earnings. This gives a clearer picture of what the employee was paid for.

How much leave an employee has, and how fast it builds up, is not set here. Those entitlements come from the National Employment Standards and any award or agreement that applies. Fair Work is the place to check entitlements, and the Academy's Leave module will cover them.

For accountants & bookkeepers

Under STP Phase 2, paid absences are disaggregated from gross. Most paid leave is reported under the paid leave category, while certain types are itemised on their own. The pay treatment (earnings, taxed, reportable) is the focus here; the entitlement and accrual detail sits with the NES and the relevant award.

Example¶

Sam takes a week of annual leave. For that week, Sam is paid for the leave hours instead of hours worked. The leave pay is included in Sam's pay for that period, tax is worked out on it, and it is reported to the ATO as paid leave. On the payslip, the leave shows as its own line so Sam can see it clearly.

Common mistakes¶

Thinking paid leave is separate from earnings — it is part of the pay for that period.
Assuming paid leave is not taxed — it is taxed like normal pay.
Quoting one leave balance or accrual rate for everyone — entitlements depend on the National Employment Standards and the award, so check Fair Work.

How this works in myaccountant¶

In the app — when you add paid leave to a pay run, it appears as its own pay item. myaccountant works out the PAYG withholding for you, shows the leave on the payslip as a separate line, and reports it to the ATO under the correct payment type.

Key points¶

Paid leave is paid as part of that pay period's earnings.
Paid leave is taxed like normal pay.
Paid leave is reported to the ATO separately from other earnings.
On a payslip, paid leave usually shows as its own line.
How much leave an employee gets comes from the National Employment Standards and any award — check Fair Work for entitlements.

Learn next¶

General information only — not tax, super or financial advice.

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