How to Create a PTO Policy for Your Small Business

Your small business has outgrown "just let me know when you need a day off." You're the owner, the manager, and the HR department, and you need a policy that's fair without becoming another job to manage.

Creating a formal paid time off (PTO) policy is a milestone. It means your business has grown past the point where informal arrangements work — and that's worth building right.

As you work on your PTO policy, here are four categories to think about: what your state requires, what's reasonable for your size, how to structure the policy simply, and how to make sure it works with your payroll solution.

Federal Law Doesn't Require PTO, But Your State Might

Paid time off is a broad term covering the time off your business provides. It may be offered as a single combined policy or as separate types, such as vacation time, sick time, paid holidays, bereavement, and personal days.

It's distinct from the Family and Medical Leave Act (FMLA), a federal law that guarantees employees unpaid leave for qualifying events when they work for a business that employs 50 or more employees. It’s also different from paid leave, which many states now require.

The amount of PTO is what you can choose to offer based on your business needs on top of any legal requirements.

"At the federal level, family and medical leave has traditionally applied to larger employers, but many states have gone further," said Seth Barany, legal product counsel, SixFifty, during a recent employment law webinar presented by SurePayroll® By Paychex.

Those state laws apply to businesses of all sizes, including yours.

Two areas where state law could directly shape your policy are:  

• mandatory paid sick leave minimums  

• what you must do with unused PTO when an employee leaves  

Before you begin offering PTO, find out what you’re required to offer. That answer depends on where your employees work.

States That Require Paid Leave

As of 2026, more than 20 states and Washington, D.C. require private employers to provide paid leave — including paid sick leave, in many jurisdictions.  

The most common standard is one hour of paid sick leave for every 30 hours worked, according to SixFifty, with annual caps of 40 to 80 hours.

States with mandatory paid sick leave laws include California, Massachusetts, Oregon, Colorado, Connecticut, Maryland, New Jersey, New York, Rhode Island, Vermont, Washington, Arizona, Maine, Michigan, Minnesota, Nevada, and New Mexico. If your business employs workers in one of these states — or in a city with its own requirements — those rules apply to you.

Requirements differ across states. Make sure you’re working with the most up-to-date paid leave rules for each state where your employees work by checking with each state's Department of Labor website.  

The SurePayroll Employee Handbook Builder, powered by SixFifty, can make this task easier by helping you create a handbook that covers state-specific leave laws and much more.  

For information about other state employment laws, check out 2026 Employment Law Changes: What Small Employers Should Check Now.  

What State Requirements Mean for Your Policy Design

Your policy must meet or exceed your city or state's minimums, but you have flexibility in how you structure it.

One practical approach for small businesses: Combine vacation and sick leave into a single PTO bank. As long as the total paid time off policy meets your state's sick leave minimum and your policy clearly states the time can be used for illness, you may be compliant in many states.

Washington, for example, permits a combined PTO bank to satisfy its state sick leave requirements, as long as the policy meets state minimums on accrual rate, permitted uses, and carryover.  

Here's what that looks like in practice: If your employees work in a state that requires five days of paid sick leave and you offer 12 days of PTO, you're meeting that requirement, as long as it’s clear your policy allows employees to use that time for illness.

The key is to know your state's requirements first, then build from there.

Common PTO Options for Businesses With Under 10 Employees

For businesses with under 10 employees, PTO practices often leave room for flexibility. Federal labor data shows that after one year of service, employees commonly receive around 10 days of paid vacation, with about 30% of private-sector workers in the 10–14 day range. Small business owners can use this range as a reference point when considering PTO options.

Here's what competitive looks like for your size:

• One to three employees: Five to seven vacation days in year one, plus whatever your state requires for sick days, could be a complete and competitive policy.

• Four to 10 employees: 10 PTO days is often considered the market rate.

One more figure to keep in mind: 70% of companies with one to 49 employees offer paid vacation, compared to 91% at businesses with 500 or more employees.

You're Not Competing With Google's Benefits Package and That's the Point

Small businesses compete on flexibility, company culture, work-life balance, and the kind of trust that comes from working with people you know. Not headcount.

You don't have to build your policy based on what a 50+ person company does. Build it for what a business your size needs.  

That kind of approach can be simple in practice.  

For example, Marcus runs a three-person landscaping company in Georgia. He offers five PTO days in year one and seven in year two. His employees know exactly what to expect. That consistency is the policy working.

Pick One Structure and Keep It Simple

For a business with fewer than 10 employees, two types of PTO policies generally work best: accrual or lump sum. Here's guidance on how to choose.

Accrual vs. Lump Sum: The Rule of Thumb

Lump sum means employees receive their full PTO allotment on January 1 (or their hire date). It's simple to explain and to track. The tradeoff: an employee can use all 10 days in February and then resign.

Accrual means employees earn PTO as they work — typically calculated by pay period. It's fairer for mid-year departures.

A general rule of thumb: If you're tracking PTO manually for a business with fewer than five employees, lump sum may be easier to manage.  

For small businesses with larger or growing teams, PTO accrual generally works better. Plus, it's fairer for mid-year departures and easier to administer consistently as your team grows. Whichever structure you choose, write it down and apply it consistently.

Generally, unlimited PTO is not recommended as a starting point for a small business. It can create scheduling unpredictability, can't be cashed out when employees leave, and often results in employees taking less time off — not more. Without a set number of days, many employees feel uncertain about how much time is acceptable to take. A clear, modest policy outperforms a generous, undefined one.

The Accrual Formula, Simplified

Divide total annual PTO hours by the number of pay periods in the year. The result is how much PTO an employee earns per pay period.

Part-time employees accrue proportionally to their hours worked; multiply their actual hours by the same rate. Set the rate once; the calculation is the same every pay period.

Decide Your Carryover Rules Before Sharing

Before sharing your policy with your team, decide what happens to unused PTO at year-end.  

Options include:

• Use-it-or-lose-it: Employees forfeit unused PTO at year-end. Simple to administer, but prohibited in California, Colorado, and Montana, where accrued PTO is treated as earned wages that cannot be forfeited under any policy.  

• Full carryover: Employees keep all unused PTO. Gives flexibility, but balances can accumulate into significant payout obligations over time.

• Capped carryover: Employees carry over up to a set amount, five days, for example. This balances employee flexibility with predictable cash flow.

Some states require paying out unused accrued PTO in the final paycheck when an employee leaves, regardless of what your policy says. These include California, Colorado, Illinois, Massachusetts, Nebraska, New Mexico, North Dakota, and Rhode Island (if the employee has been with the company at least one year). The lists in this article are not comprehensive, so be sure to check the rules in the states where your employees work to see which requirements apply to your business.

Seven Things Your Written PTO Policy Needs to Cover

A written PTO policy doesn't have to be long. It does have to be clear. Cover these seven things, and there's less guesswork for you and your employees.

The Checklist

1. How much PTO employees receive and how they earn it, accrual rate or lump sum amount

2. Eligibility – full-time employees only, or are part-time employees included on a prorated basis?

3. How to request time off and how much advance notice is required

4. Who approves requests and what a denied request looks like

5. Carryover rules and any annual cap on unused time

6. What happens to unused PTO when an employee leaves, if not determined by your state

7. When the policy takes effect and how often it will be reviewed

Keep the policy short and easy to understand, ideally something most employees could read in just a few minutes. Before anyone starts earning PTO, make sure they review it and acknowledge it in writing or digitally. Then plan to revisit the policy once a year to be sure it still aligns with how your business operates; year‑end is a natural time to do that.

Once it's written and acknowledged, there's one more step: making sure it runs.

Integrate PTO Tracking With Payroll

Tracking PTO manually, using a spreadsheet or shared calendar, can work when you have one or two employees. As your team grows, keeping balances accurate will take more time and extra double‑checking before each payroll run. Even small mistakes can create confusion, so having a simple, consistent system in place can help avoid issues down the line.

What Breaks When PTO and Payroll Don’t Connect

When PTO is tracked manually, small errors can add up. An incorrect balance can turn into the wrong payout when an employee leaves. In states that require PTO to be paid out at separation, those numbers need to be accurate. Syncing PTO and payroll can help reduce guesswork and keep final payouts cleaner.

This matters even if employees don’t use all of their PTO. A 2024 Harris Poll found that 78% of employees don’t use their full PTO allotment, which means unused balances can build over time. When someone does leave, those balances come back into focus and having reliable records makes the transition easier for everyone.

How to Set It Up So It Runs Automatically

The easiest time to set up PTO tracking is when you set up payroll. But if you didn’t do it then, you’re in good company. Many owners start to focus on PTO the first time an employee asks. That’s a good signal to get organized and set yourself up going forward.

When time tracking connects to payroll, it’s easier to manage PTO.  

SurePayroll integrates with popular time‑tracking tools so approved time can flow into payroll. PTO balances and reports are available in your dashboard when you need them, making it easier to answer employee questions and review final paycheck calculations with confidence.

Now you’re not just tracking a policy, you’re running a system you and your employees can rely on day to day.

A PTO Policy Is a Sign Your Business Is Growing

A formal PTO policy is a milestone. Your business has grown past the point where informal arrangements work — and that's worth getting right.

When you create a PTO plan built for a business your size, grounded in your state's requirements, and connected to payroll, it becomes part of how your business operates. Not a document you rebuild every time you hire.

SurePayroll can help bring payroll, time tracking, and PTO reporting together for businesses with one to 10 employees.  

Ready to set up a small business payroll solution that can help you track time? See how you can put SurePayroll to work for you at surepayroll.com/payroll.