Is PTO Taxed? Everything You Need to Know

If you are an employee, you’ve most likely asked the question “Is PTO taxed?”, and the short answer is yes. Your PTO when it’s paid out is taxable income, but how it is taxed is a different story. You need to know this to understand what your payout will look like when you leave a job or cash out unused vacation time.

In this article, we’ll answer your “Is PTO taxed?” question and shed light on everything else. That includes what PTO cash out means, how to calculate PTO payout, and the rates. You can get accurate pay stubs that show your PTO clearly with a paystub generator.

What Is PTO Payout and Is PTO Taxed?

PTO payout is the amount of money you get paid for the leave or vacation days you did not take while you were employed. This may include sick days or personal days. It may be paid when you’re leaving the company or mid-year, if your company allows it. So, in place of unused vacation days, you get money. 

Many businesses give PTO payout to terminated employees after letting them go or when employees resign. Some other ones allow their employees to cash out their accrued vacation time while they still work there. However, this is as far as the company policy and the laws of the state allow.

Is PTO Payout Taxed?

Yes, PTO payout is seen as taxable income by the IRS. It doesn’t matter when you get your money. Whether it’s when you leave the company or while you still work there, the pay is subject to taxes like any other pay.

Just like your regular paycheck, your employer will also withhold taxes out of this payout. Think of all the regular ones. Federal income tax, Social Security and Medicare, which are called FICA taxes, and any state or local payroll taxes. The main difference is that here, they calculate the taxes differently. 

Read More: Do You Get a 1099 for Life Insurance Proceeds?

What Are the PTO Payout Tax Rates?

Vacation pay is taxed by the IRS as supplemental wages and not as regular wages. These supplemental wages include all the other compensation you get apart from your usual pay. For example:

• bonuses

• commissions

• severance pay.

How Much Is PTO Payout Taxed?

To get the rate for the supplemental pay, there are two methods your employer can use:

1. Flat Tax Method

Here, if your supplemental wages are up to $1 million, your employer takes out 22% of that as federal withholding. But if the pay is more than $1 million, it goes up to 37%.

2. Aggregate Method

With this method, they take the PTO payout and add it to your last regular paycheck. Then, they calculate taxes based on the grand total. So, the rate may not always be the same. Your rate can depend on the method your employer chooses to use. 

Check out: Make paystubs online using simple pay stub templates

How Is PTO Taxed Differently?

Generally, the taxes you pay on your PTO payout aren’t any different from the ones you pay on your regular wages. However, for your regular paycheck, the withholding is made throughout the year. When it comes to PTO, you’ll most likely get a lump sum payment for your accrued vacation time. And since it’s considered additional income, the withholding on it may be higher. That’s how PTO payout is taxed differently.

Does PTO Get Taxed at a Higher Rate?

For “Does PTO payout get taxed at a higher rate?”, the answer is no. This is more of a misconception. The vacation payout tax rate is not higher than the one for regular income. It is only the withholding that seems higher. Since vacation pay is seen as supplemental income, they often use the 22% flat rate for federal withholding.

However, everything still comes together when you file your tax return. The IRS gets the actual amount of tax you owe, and if you have paid too much, you get a refund. And if you paid too little, you’ll have to pay the rest.

Read more: Differences Between a Pay Stub vs Payslip

State Laws That Require Employers to Pay Out PTO

Whether or not you can get a PTO payout depends on where you work to a large extent. The federal laws don’t mandate PTO payouts. However, in recent times, many states have laws that compel employers to pay for any accrued time off. 

PTO Payout California

California is a state that boasts of super strict rules. In this state, your accrued vacation time is seen as your earned wages. So, the employer must calculate the vacation payout tax rate California. Then, they have to pay your accrued but unused PTO when you leave the company. It doesn’t matter if you quit or if the employer fires you. They also prohibit use-it-or-lose-it policies, so you can’t forfeit your vacation time.

Other States

Other states that also have some PTO payout laws include:

• Colorado

• Illinois

• Indiana

• Louisiana

• Maine

• Maryland

• Massachusetts

• Montana

• Nebraska

• North Dakota

• Rhode Island

• West Virginia 

The requirement for paying out accrued but unused PTO can vary from state to state. Other states permit employers to implement use-it-or-lose-it policies in some cases. This means employers can set a time frame for employees to use their accrued vacation time before it expires. 

Also Read: Pay Stub Laws: What Employers Must Provide by State

How To Calculate PTO Payout

Now that you understand " Is PTO taxed?", here's how to calculate the amount of unused but accrued PTO payout you may get:

1. Determine Total PTO Hours

Check your pay stub or other employee data to get your accrued PTO balance. That includes all your unused vacation time and paid time off that you have accumulated but not used.

2. Calculate Gross Pay

When you get your total unused days, turn them into hours. Then, multiply the number of hours by your hourly rate. That’s it for hourly employees. For employees who get salaries, get your annual salary first. Then, divide it by the number of hours in a full-time work year, which is 2,080 hours. That gives you your hourly pay. Then, multiply that by your PTO hours. 

3. Withhold Taxes

Lastly, withhold taxes from the total amount. With the flat tax method, that’s usually 22% for supplemental wages. You’ll also have to take out any state and local taxes from the gross amount.

PTO Cash Out Calculator Methods

You can easily view the actual amount of money you are getting with a PTO payout tax rate calculator. On the internet, you can find online tools that you can use to get an estimate. To use a vacation payout tax calculator, you’ll still need the information you use when calculating on your own. So, you need your unused time, hourly wage and tax data to see how much you will take home.

Check out: Create your pay stubs from any device with our online paystub generator

To Sum It Up

If you know the answer to "Is PTO taxed?", this can help you take the right steps regarding your vacation days. You may be in California and with high payout protection, or even in more lenient states. Knowing your rights and tax obligations matters to ensure you get fair pay for your accrued time off.

To get to how is PTO taxed, you need the right numbers from your pay stubs. Our paystub creator can help you create professional pay stubs easily. With our tool, your pay process becomes a walk in the park.