Eighty hours at $30 an hour is $2,400, and that is the number most people have in their head when they hand in their notice. Two things happen to it on the way to the bank. One of them can take the whole amount, and it has nothing to do with tax.
First, whether you are owed anything at all
There is no federal law requiring an employer to pay out unused PTO. Whether you get it turns on your state, and then on your handbook, and the states fall into three groups.
| State | Are you paid out? | The rule |
|---|---|---|
| California | Yes, always | Earned vacation is wages. Forfeiture policies are illegal, and all earned, unused vacation is paid at your final rate of pay. A cap on future accrual is lawful. |
| Colorado | Yes, if vacation is offered | No employer has to offer vacation. If one does, earned vacation must be paid on separation and any term forfeiting it is void. A cap on accrual is allowed; a cap on carryover is not. |
| Texas | Only if promised in writing | A payout is owed only where a written policy or agreement promises one, and the policy’s own wording controls. A policy may lawfully pay out only to people who gave two weeks’ written notice. |
That last column is the one worth reading twice. In a policy state, the conditions attached to the payout are enforceable, and notice periods are the common one. Resigning without notice can cost you the entire balance quite legally. If you are in a policy state and you are planning to leave, read the leave section of the handbook before you decide when to tell anyone.
A cap and a use-it-or-lose-it rule are not the same thing, and the difference is legal as well as practical. Colorado draws the line precisely: a policy can cap how much you accrue in total, because that does not take away anything already earned, but it cannot cap how much carries over into next year, because that does. California reaches the same place from the other direction: caps are fine, forfeiture is not. So a balance you are sitting on is usually safer than it feels, and the thing quietly costing you is the accrual you stopped earning while you sat at the ceiling. The PTO cap article works through what that costs in hours.
What the hours are worth
Almost always your current rate, not the rate you were on when you earned the time. That cuts in your favor: a raise shortly before you leave revalues the whole balance, including hours banked years ago at a lower rate. California writes it into the statute as “final rate of pay” and most employer policies follow the same convention.
The PTO payout calculator turns a balance and a rate into the gross figure. Everything below is what happens to that figure afterward.
Why the payout is withheld like a bonus
The IRS treats a PTO payout as supplemental wages, the same bucket as bonuses, commissions, severance and back pay. That gives your employer two lawful ways to withhold from it, and they behave completely differently.
- The percentage method taxes the payout on its own at a flat 22% federal, plus 7.65% for Social Security and Medicare. That is 29.65%, and it does not move with your salary.
- The aggregate method adds the payout to a regular paycheck and withholds as though you earned that much every period. It tracks your salary, so it can land either side of the flat rate.
- Which one you get is a payroll setting, not a choice you make.
Here is what actually reaches the account on that $2,400, run both ways at five salaries:
| Your salary | Flat 22% method | Aggregate method |
|---|---|---|
| $30,000 | $1,688 | $1,829 |
| $50,000 | $1,688 | $1,752 |
| $65,000 | $1,688 | $1,690 |
| $90,000 | $1,688 | $1,665 |
| $120,000 | $1,688 | $1,642 |
The flat column never moves, because it cannot. The aggregate column slides with your salary, and the two cross at around $65,000. Below that line the aggregate method leaves you more; above it, the flat 22% does. The gap is $141 at $30,000 and $46 at $120,000, so it is real money without being life-changing, and nobody gets to pick.
Your state usually takes its own cut on top, and the mechanics of both methods, including the $1 million threshold that forces 37%, are worked through in why a bonus gets taxed at 40%. Either method is a withholding choice your employer makes, not a tax rate, so the difference comes back at filing whichever one lands on your payout.
Withholding is not the tax
This is the part that saves people a lot of unnecessary annoyance. Nothing above is a tax rate. It is a withholding rate, which is an estimate your employer is required to make on the day they pay you.
Your payout is ordinary income. At the end of the year it is added to everything else you earned and taxed at your actual marginal rate, and the difference between that and what was withheld is settled on your return. Someone in the 12% bracket who had 22% withheld gets the excess back. Someone in the 24% bracket who was aggregated lightly may owe a little. The payout does not attract a special tax and it is not taxed twice. It was only ever estimated.
One genuine exception: a large payout arriving in the same year as a full salary can push part of your income into a higher bracket. That is a real effect, but it is a bracket effect on your whole year, not something the payout suffers on its own.
Should you burn the time or bank it?
If you are leaving and you have a choice, the answer depends almost entirely on which state group you are in.
- In a policy state where nothing is promised in writing, burn it. Time off you take is paid; a balance you leave behind may simply evaporate. This is the single biggest number in this article and it is not a tax question.
- In a state where the payout is guaranteed, banking it is safe, and a raise before you go increases what the whole balance is worth. Leave taken is also paid at your current rate, so there is no rate advantage either way.
- Taking the leave keeps you on the payroll longer, which can matter for health coverage, a vesting date or a bonus eligibility date far more than the withholding difference does. It also changes the salary half of your final check, which is prorated to your last day either way.
- Below about $65,000, leave taken as time off is withheld more lightly than a lump payout under the flat method, because it is paid as ordinary wages. Above that line the difference reverses and is small either way.
If you are not leaving yet and you want to know what you will have banked by the time you do, the PTO accrual calculator walks the year period by period.
Frequently asked
Under the flat method, about 70 percent before state tax: 22 percent federal plus 7.65 percent for Social Security and Medicare is 29.65 percent, so a $2,400 payout leaves roughly $1,688. Under the aggregate method it moves with your salary, and below about $65,000 you keep a little more.
No federal law requires it. California treats earned vacation as wages that cannot be forfeited, and Colorado requires earned vacation to be paid if vacation is offered at all. Texas requires a payout only where a written policy or agreement promises one. Check your own state labor department and your handbook.
In a state where the payout depends on employer policy, yes. A written policy that pays out only to employees who gave two weeks' written notice is enforceable in Texas, for example. In states where earned vacation counts as wages, a term that forfeits it is void and the notice you give makes no difference.
No. It is withheld at a different rate, which is not the same thing. A payout is ordinary income, added to the rest of your year and settled at your real marginal rate on your return. If 22 percent was withheld and your bracket is 12 percent, the difference comes back as a refund.
If nothing is promised in writing, use it, because a balance you leave behind may simply evaporate. If the payout is guaranteed, either works, and taking the leave keeps you on the payroll longer, which can matter more for health coverage or a vesting date than the withholding difference does.