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PTO payout flat taxed?

This is kind of a personal question since I've never worked at a company that pays out PTO. My husband was promoted at work from hourly to salary and as a result was paid out for his PTO because the accruals are different for hourly and salary. It appears they flat taxed his payout, does this sound right?


  • It is a legal action. You can argue about it being "right" since that is matter of opinion, not fact.

    There are a small number of legal methods the employer can use to tax this type of payments. Flat tax is the easiest for the employer to use and explain. The choice of methods is legally 100% the employer's option. And having done payroll for many years, employees will complain no matter what method is used. And IRS will do bad things to employers who do not exactly follow one of the legal methods.

  • Thanks for your response. I know bonuses are usually flat taxed but I didn't think this would be :( Oh well!

  • Any payment not based on hours worked in the pay period is legally supplemental wages. This includes bonus payments, vacation/PTO buyouts and pretty much everything else. Employers are not required to use flat tax but are required to use a legal method. Flat Tax is easy. Everything is (a lot) harder. Only dumb employers go out of the way to make work for themselves. I would need a very good reason to consider using a method other then Flat Tax. Generally the reason is my boss tells me to.

    Payroll is hard on a good day. Smart employers do nothing to make it harder. I am huge believer in the KISS principle.

  • One very good reason for using the aggregate method is that the OPTIONAL flat rate method (22% of the gross payment) may not be used if the income tax has not been withheld from the employee's regular pay during the current calendar year or the immediately preceding calendar year. Smart payroll professionals will NOT use the optional flat (22%) method for employees who are in that situation. Also, the Optional flat rate method cannot be used if the mandatory flat rate method applies - for that matter, the aggregate method may not be used either. The mandatory flat rate method applies when a cumulative amount of $1 million or more of supplemental pay has been paid to the employee during the calendar year. The mandatory flat rate method applies a 37% withholding rate for income tax to the employee's gross supplemental pay to the extent the cumulative supplemental pay exceeds $1 million.