HR Mavericks

Eddy’s HR Mavericks Encyclopedia

PTO Payout

Why must HR professionals understand what a PTO payout is, what laws regulate PTO payouts, when it’s paid out, and how to calculate? Continue reading to find these answers to prepare yourself and your organization.

What Is a PTO Payout?

A PTO or paid time off payout occurs when an employee is paid for their unused paid time off either at the time of termination or during their employment.

Understanding PTO Payouts

It’s important for HR professionals to understand PTO payouts so they can create, follow and enforce a clear policy for all employees. Some states also have laws that require PTO and vacation to be paid at the employee’s particular rate.
  • Compliance. Several states require that PTO and vacation be paid to separated employees. In states without a law, it is up to the employer whether or not they pay out PTO. HR plays a key role in determining if their company is impacted by state law. They help create or update policies and procedures to keep their company compliant.
  • Reduce liability. Some state laws define paid time off as acquired vacation time and as wages. This means that if these particular wages are not paid out at the time of separation, an employer could be held liable for unpaid earnings. In fact, some states, such as Massachusetts, have laws which state that an employer could face fines up to $1,000 if concluding income isn’t paid.
  • Consistency. Will your company only pay out PTO when an employee is terminated due to voluntary resignation? What are the conditions that qualify an employee to receive a PTO payout? Whether or not state laws apply to your company, answering these types of questions is important in creating your company’s approach and to help create policies. Following set guidelines consistently and communicating them to your staff will help everyone understand PTO payouts to more effectively handle relevant situations when they arise. It can also be helpful to have employees sign an acknowledgment of their understanding just in case.
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Important Laws Regarding PTO Payouts

Even though many employers offer PTO as a benefit, not all state laws require employers to pay it out. For example, several states have laws that require PTO to be paid out upon termination or at the end of the year if PTO wasn’t used. These states include Vermont, Massachusetts, Rhode Island, Connecticut and California.

Law 1: Use It or Lose It Policy Isn’t Applicable

Some state laws prohibit a “use it or lose it policy,” which means employees must be paid their PTO or vacation at the end of the year if they haven’t used it. Some states’ laws, such as California, may allow for an accrual limit, and other states, such as Colorado, require employers to pay out acquired vacation time if an employee retires.

Law 2: Company Policy vs the Law

Even though some states require PTO to be paid out under certain circumstances, there are still methods companies can use to manage this. For example, California employers are not legally required to provide paid or unpaid time off to employees. Therefore they can create their own policies for appropriate use. This means that a company policy could prohibit employees from accruing PTO until they have been employed for 3 months.

Law 3: Taxed Correctly

If your company decides to pay out PTO, it’s important to follow guidelines from the IRS which determine how to tax PTO payouts. Further information regarding this process can be located below in this encyclopedia entry.

When Is PTO Paid Out?

Does a company have to pay out PTO? The answer is that it depends. There are several instances when PTO can be paid out. Companies have the option to provide a PTO payout at the end of the year if employees have not used their PTO. It can also be paid out upon termination and at retirement. Keep in mind that business location is very important in determining all of this. By taking the time to research your state laws to create a policy beforehand, you can save your business a lot of headache in the long run.

Upon Termination

If your company operates in a state that requires payment for unused PTO, be sure to pay an employee all of the PTO they have accrued if they are terminated. Keep in mind that in some states, such as California, if a business’ policy excludes part-time employees from participating in PTO or vacation, you legally don’t have to pay out these employees.

At the End of the Year

If your state has laws which require employers to pay out employees at the end of the year, you must do so to remain compliant. This means a “use it or lose it” policy could be illegal. This is especially important to understand while operating in the state of California.


Retirement can also be a particular condition in which state law requires that an employee be paid out. A specific example of this is in the state of Colorado.
Streamline your PTO with Eddy
Streamline your PTO with Eddy
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How to Calculate PTO Payouts

PTO payouts are subject to the supplemental income flat rate tax of 22%. Fortunately, the IRS provides guidance on how to appropriately tax PTO payouts. Please follow the steps below to calculate PTO payouts correctly.

Step 1: Determine Total PTO Hours

The employee must have accrued PTO in order to cash it out. This needs to be determined to know how much the employee will be paid out. In this example, we will use 30 hours.

Step 2: Calculate Gross Pay

Now that you have determined the number of hours that an employee will be paid out on, we can calculate the gross pay. Let’s assume this particular employee earns $15.00 per hour. We will multiply $15.00 by 30, which equals $450.

Step 3: Withhold Taxes

Now that you’ve calculated your gross pay, you can multiply this number by the federal supplemental tax rate. $450 X 22% = $99. This amount ($99) is how much should be withheld from the PTO payout for federal income taxes.
James Barrett

James Barrett

James has worked in the HR field going on 5+ years and has held various positions of leadership. His areas of expertise are in benefits, recruiting, onboarding, HR analytics, engagement, employee relations, and workforce development. He has earned a masters degree in HR, along with a nationally recognized SHRM-SCP certification.
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Frequently asked questions
Other Related Terms
Benefits Administration
Carryover (PTO)
Commuter Benefits
Company Car
Competitive Pay
Dental Insurance Benefit
Disability Insurance
Earned Wage Access (EWA)
Employee Benefits
Employee Incentives
Employee Relocation
Employee Rewards
Employee Stock Ownership Plan (ESOP)
Employee Swag
Employee/Employer Flexibility
Equity Compensation
Flexible Spending Account (FSA)
Floating Holidays
Golden Handcuffs
Group Incentive Plan
Health Reimbursement Account (HRA)
Health Savings Account (HSA)
Life Insurance Policy Benefit
Lump-Sum PTO Policy
Open Enrollment
PTO Accrual
PTO Accrual Cap
Paid Holidays
Paid Vacation
Restricted Stock Units (RSU)
Retirement Benefits
Roth 401k
Section 125 Cafeteria Plan
Special Enrollment Periods
Spousal Surcharge
Traditional 401k
Tuition Reimbursement
Unlimited PTO
Vision Insurance Benefits
Workers' Compensation
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