Most business owners know annual leave exists as a line on the balance sheet. Fewer know what it actually costs each year in real cash terms. For a full-time employee earning $80,000, four weeks of annual leave does not cost $6,154 (the gross pay for those four weeks). Once you add superannuation, leave loading (where applicable), the productivity gap during absence, and the cost of backfilling or redistributing work, the true annual cost sits closer to $9,000 to $11,000 per employee. For a team of 20, that is $180,000 to $220,000 per year in leave-related costs before you even consider sick leave, long service leave, or the compounding effect of untaken leave balances. This guide breaks down every component so you can budget accurately and manage leave proactively rather than reactively.
The starting point is straightforward. A full-time employee is entitled to four weeks (20 days or 152 hours based on a 38-hour week) of paid annual leave per year under the National Employment Standards. The direct cost has three components.
Base leave pay: $80,000 / 52 weeks x 4 weeks = $6,154
Superannuation (12%): $6,154 x 12% = $738
Leave loading (17.5%, if applicable): $6,154 x 17.5% = $1,077
Total direct cost: $7,969 (with leave loading) or $6,892 (without leave loading)
For a detailed explanation of who pays leave loading and how to calculate it for shift workers and part-timers, see our companion guide on what is leave loading in Australia. To check whether super applies to the leave loading component, review the OTE classification guidance in that article.
If your total Australian wages exceed the payroll tax threshold in your state ($1,200,000 in NSW for 2025-26), annual leave payments including leave loading are part of the payroll tax base. In NSW, the rate is 5.45%. On $7,969 of leave costs per employee, that adds another $434. For a 20-person team above the threshold, payroll tax on annual leave alone adds roughly $8,686 per year. Our payroll tax threshold calculator helps you model your liability by state.
The direct cost is only part of the picture. The bigger impact for most SMEs is what happens to the work while the employee is away.
Research consistently shows that employee productivity drops in the days before leave (as people wind down, hand over tasks, and mentally disengage) and in the days after they return (as they catch up on emails, re-enter workflows, and deal with issues that arose during their absence). A conservative estimate is one day of reduced productivity on either side of the leave period. For a two-week block of leave, that is two days of reduced output, equivalent to roughly $615 per leave block for an $80,000 employee. This cost is invisible on the P&L but real in output terms.
When someone is on leave, their work either stops, gets redistributed to colleagues, or gets backfilled by a temporary hire. Each option carries a cost.
Work stops: Suitable only for roles where a short pause is acceptable. Customer-facing roles, payroll processing, and accounts receivable cannot simply stop for four weeks. If invoices do not go out, cash flow suffers. Our guide on why cash feels tight when profits look fine explains how operational gaps like this create cash flow drag.
Work gets redistributed: The most common approach in SMEs. Colleagues absorb the absent employee's tasks on top of their own work. The cost here is overtime (paid or unpaid), reduced output quality, and increased stress. If team members are already at capacity, redistribution just shifts the productivity loss to other people. The cost is real but diffused across the team.
Temporary backfill: Hiring a temp or casual to cover the absence costs money directly. A temporary finance or admin worker through an agency costs roughly $35 to $55 per hour including agency margins. Two weeks of backfill at 38 hours per week at $45 per hour costs $3,420, and that person is almost never as productive as the permanent employee they are covering.
Annual leave accrues progressively and accumulates without limit in most circumstances. Every pay cycle, the liability on your balance sheet grows. And unlike a fixed asset, the cost of leave increases over time because it is paid out at the employee's current rate of pay, not the rate at which it was accrued.
Consider an employee who was earning $65,000 when they accrued four weeks of leave three years ago but now earns $85,000. Those four weeks are valued at the current rate: $85,000 / 52 x 4 = $6,538, not the $5,000 it would have cost when accrued. Over time, this revaluation effect inflates your leave liability even if no additional leave accrues. Our annual leave liability estimator models this at the team level, and our in-depth article on annual leave liability as a $200k time bomb covers the risks in detail.
For a business with 25 employees averaging $75,000 in salary and 1.5 weeks of excess leave each (above the four weeks accrued annually), the excess liability alone is roughly $54,000. If three of those employees are on $100,000 or more with six-plus weeks banked, the concentration risk is significant. A single resignation can trigger a payout of $12,000 to $20,000 that was never budgeted as a cash outflow.
Long service leave is a separate entitlement that runs in parallel with annual leave. In most states, employees become entitled to long service leave after 7 to 10 years of continuous service, with pro-rata entitlements payable on termination after a shorter qualifying period (typically 5 to 7 years depending on the state and circumstances).
The interaction matters because long-tenured employees often accumulate large leave balances across both annual leave and long service leave simultaneously. An employee with 12 years of service in NSW earning $95,000 could have a combined payout liability of 8.67 weeks of long service leave plus accrued annual leave, potentially exceeding $30,000 on termination. For a complete state-by-state breakdown of long service leave, see our leave entitlements by state 2026 guide.
Portable long service leave schemes in construction, cleaning, community services, and security add another layer. If you operate in these industries, you may be paying levies to the relevant state body as well as accruing the entitlement. Factor both the levy cost and the potential payout into your workforce planning.
The way you account for annual leave has a direct impact on how accurately your financial statements reflect reality. There are two sides: the P&L expense and the balance sheet liability.
P&L treatment. Annual leave pay should be expensed as it accrues, not when it is taken. If you only recognise the cost when employees actually go on leave, your P&L will understate wages expense in months where nobody takes leave and overstate it in holiday-heavy months like December and January. Accrual-based accounting smooths this out and gives you an accurate monthly picture of your true people costs. For a refresher on why this matters, our guide on cash vs accrual accounting explains the difference.
Balance sheet treatment. Accrued annual leave sits as a current liability on your balance sheet because the employer is obligated to pay it out either when the employee takes leave or when employment ends. This liability should be revalued at least monthly to reflect current pay rates. In Xero, the payroll module tracks leave accrual automatically, but you need to ensure the general ledger provision matches the payroll balance. A common issue in SME accounts is a leave liability that has not been updated since the last EOFY, meaning the balance sheet understates the true obligation by thousands of dollars. Our guide on how to read a profit and loss statement and our balance sheet health score tool can help you interpret where leave sits in the bigger picture.
Impact on cash flow. Leave accrual is a non-cash expense when it hits the P&L, but it becomes a very real cash outflow when the employee takes leave or resigns. This disconnect catches SME owners who look at profit but do not track cash separately. A profitable month can still be a negative cash month if two employees are on leave and a third resigns with six weeks accrued. For more on this dynamic, our article on $500k profit but $12k in the bank explains how profit and cash can diverge.
For a full-time employee on $80,000, covered by an award with 17.5% leave loading, at a business above the NSW payroll tax threshold:
Base leave pay (4 weeks): $6,154
Leave loading (17.5%): $1,077
Superannuation on leave pay (12%): $738
Super on leave loading (12%, if OTE): $129
Payroll tax (5.45%): $434
Productivity loss (est. 2 days per year): $615
Work redistribution cost (est.): $500
Estimated total annual cost: $9,648 per employee
For a team of 20, that totals approximately $192,963 per year. If you add workers compensation insurance premiums (which apply to leave payments) and the balance sheet impact of accruing but untaken leave, the true figure is higher still.
You cannot eliminate annual leave costs, but you can manage them proactively rather than letting them accumulate into a cash flow problem.
Set a leave balance policy and enforce it. Many employers set a maximum accrual of six to eight weeks before requiring employees to take leave. Under the Fair Work Act, employers can direct employees to take annual leave in certain circumstances, provided the direction is reasonable. For award-covered employees, check the specific award for provisions about directing leave. Our guide on excessive annual leave balances walks through the process.
Budget for leave as a line item, not an afterthought. Include the fully loaded cost of annual leave (not just the base salary component) in your annual workforce budget. This means your financial forecasts reflect reality rather than understating people costs by 10% to 15%.
Track leave balances monthly. Use your payroll system to generate a monthly leave balance report. Flag any employee with more than six weeks accrued and have a conversation about scheduling leave before the balance grows further. Our leave liability by employee estimator helps you visualise the concentration of risk across your team.
Stagger leave across the team. If everyone takes leave in January, you have four weeks of reduced capacity. If leave is spread across the year, the impact is distributed. Create a leave calendar visible to the team and set limits on how many people in the same function can be on leave simultaneously.
Cross-train to reduce backfill costs. Every role that only one person can do is a role where leave creates a problem. Invest in cross-training so that leave absences can be covered internally without overtime or temporary hires. This also supports succession planning.
Consider cashing out leave where permitted. Under the NES, annual leave can be cashed out if the applicable award or enterprise agreement allows it, a written agreement is in place for each occasion, and the employee retains at least four weeks of accrued leave after the cash-out. Cashing out converts a future liability into a current expense, which may be preferable from a cash flow planning perspective. However, it does not address the underlying issue if employees are consistently not taking leave.
The direct cost of four weeks of annual leave for an employee earning $80,000 is approximately $6,154 in base pay, plus superannuation and leave loading where applicable. When you include payroll tax, productivity loss, and work redistribution costs, the total annual cost per employee typically ranges from $8,000 to $11,000 depending on salary level and applicable entitlements.
Yes. Annual leave must be paid at the employee's base rate of pay for their ordinary hours of work. In addition, many Modern Awards require a leave loading of 17.5% on top of the base rate. Annual leave is always paid out at the employee's current rate, not the rate at which the leave was accrued.
No. Annual leave only accrues on periods where the employee is actually working or on paid leave. Periods of unpaid leave, unpaid parental leave, or unauthorised absence do not count towards annual leave accrual.
In certain circumstances, yes. Most Modern Awards allow employers to direct employees to take excessive annual leave (typically balances above eight weeks for non-shift workers) provided reasonable notice is given and the employee retains at least six weeks after the directed leave. Employers can also direct leave during a temporary shutdown period if the applicable award permits it.
Part-time employees accrue annual leave on a pro-rata basis. A part-time employee working 20 hours per week accrues 80 hours (four weeks at 20 hours) of annual leave per year, compared to 152 hours for a full-time employee working 38 hours. The leave loading percentage (where applicable) is the same.
All accrued but untaken annual leave must be paid out in the employee's final pay at their current base rate. Whether leave loading applies to the termination payout depends on the specific award or enterprise agreement. The payout is subject to PAYG withholding at the normal marginal rate.
Annual leave can only be cashed out if the applicable award or enterprise agreement allows it. If it does, a written agreement must be signed for each occasion, the employee must retain at least four weeks of accrued leave after the cash-out, and the payment must be at the full rate including leave loading. Not all awards permit cashing out.
Annual leave liability should appear as a current liability on your balance sheet, reflecting the total accrued but untaken leave across all employees at their current pay rates. This liability should be reviewed and updated at least monthly. For Xero users, the payroll system automatically tracks accrued leave, but you should verify that the balance sheet provision matches the payroll data.
Some shift workers are entitled to five weeks of annual leave per year instead of four under their applicable award or enterprise agreement. This typically applies to employees who are regularly rostered to work Sundays and public holidays. The additional week increases the total annual leave cost by approximately 25%.
Scale Suite is a Sydney-based provider of outsourced HR and finance services for Australian SMEs. We deliver payroll processing, recruitment support, employee onboarding, employee development, people and culture support, and fractional HR oversight, all as a fully embedded team that works inside your business.
Employment Hero Gold Partner, CA-qualified, and Xero Certified, we replace fragmented HR processes and reactive people management with one responsive HR function at a fraction of the cost of full-time hires. We serve growing businesses across Sydney, Melbourne, Brisbane, and Perth, with packages starting from $1,500 per month and no lock-in contracts.
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Disclaimer: This article is general information only and does not constitute employment, financial, or legal advice. Annual leave entitlements, leave loading, and payroll tax obligations vary by award, enterprise agreement, state, and individual circumstances. Always check the specific instrument covering your employees and consult a qualified professional for advice specific to your situation.
Sources:
Fair Work Ombudsman, Annual Leavehttps://www.fairwork.gov.au/leave/annual-leave
ATO, Ordinary Time Earningshttps://www.ato.gov.au/businesses-and-organisations/super-for-employers/work-out-if-you-have-to-pay-super/ordinary-time-earnings
Revenue NSW, Payroll Tax Thresholds and Rateshttps://www.revenue.nsw.gov.au/taxes-duties-levies-royalties/payroll-tax
Fair Work Act 2009 (Cth), National Employment Standards, Division 6 (Annual Leave)
Scale Suite is a Sydney-based provider of outsourced finance and HR services for Australian SMEs. We deliver bookkeeping, financial reporting, payroll processing, fractional CFO support, recruitment, employee onboarding, people and culture support, and fractional HR oversight, all as a fully embedded team that works inside your business.
Employment Hero Gold Partner, CA-qualified, and Xero Certified, we replace fragmented finance and HR processes with one responsive, senior-level function at a fraction of the cost of full-time hires. We serve growing businesses across Sydney, Melbourne, Brisbane, and Perth, with packages starting from $1,500 per month and no lock-in contracts.
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