The Real Cost of Paid Time Off

Why PTO doesn't change salary but raises the true cost of every hour actually worked.

In this guideWhy PTO raises hourly cost · Productive vs paid hours · Types of PTO · A worked example · Accrual and liability

Paid time off does not show up as a separate invoice, which is exactly why it is so easy to overlook — and why so many labor rates are quietly too low. When you give an employee vacation, holidays, and sick days, you pay their wage for hours in which no work is produced. That does not change their annual salary, but it raises the true cost of every hour they actually work. This guide explains the productive-hours concept that fixes the problem.

The Employee Cost Calculator automatically divides by productive hours — here is why that matters.

The core idea: productive hours

A full-time schedule is about 2,080 hours a year (40 hours × 52 weeks). But nobody works all 2,080. Subtract paid time off and you are left with productive hours — the hours you actually get work out of. Your true hourly cost is total annual cost divided by productive hours, not by 2,080.

Productive hours = paid hours − (vacation + holidays + sick + other leave)

Types of paid time off to count

Vacation / PTO: commonly 5–15+ days depending on tenure and policy.
Federal and company holidays: often around 11 days a year.
Sick days: frequently 3–7 days, and required by law in many states.
Other leave: bereavement, jury duty, personal days, and similar.

Added together, 25–30 paid days off a year is typical — that is 200–240 hours, or roughly 10%–12% of the schedule.

Worked example

Take a $25/hour employee whose fully-loaded cost is about $80,000 a year on a 2,080-hour schedule. Suppose they receive 10 vacation days, 11 holidays, and 5 sick days — 26 days, or 208 hours off.

Basis	Hours	True hourly cost
Divide by all paid hours (wrong)	2,080	~$38.46
Divide by productive hours (right)	1,872	~$42.74

The difference — more than $4 an hour, over 10% — is pure margin you would give away if you priced off the wrong hours.

Key takeaway: PTO does not raise annual cost, but it shrinks the hours you can bill, which raises true hourly cost by 10% or more. Always divide by productive hours, never by the full 2,080.

PTO as an accrued liability

There is a second cost dimension for accounting: unused PTO that carries over is a liability on your books, because in many states you must pay it out when an employee leaves. Generous accrual with low usage can build a real balance-sheet obligation. For day-to-day pricing, though, the productive-hours adjustment is what matters most.

Does more PTO mean you should charge more?

Yes — mathematically. Every extra day off reduces productive hours and nudges your true hourly cost up. That is not a reason to cut PTO (it is a valuable retention tool), but it is a reason to make sure your billable rate reflects the time off you actually grant. Model it explicitly rather than hoping it comes out in the wash.

See your true cost per productive hour →

Disclaimer: This guide provides general planning estimates and educational information only. It is not tax, legal, accounting, or financial advice. Payroll tax rates, wage bases, insurance rates, and benefit costs change over time and vary by employer, state, and industry. Always confirm figures with the IRS, your state agencies, your insurance carrier, and a qualified professional before making decisions. See our Terms of Use.