Is PTO Payout Taxed? How Vacation Payout Taxes Work

Yes. Payment for unused leave is generally taxable wages. The amount withheld from the check can differ from a regular paycheck, but withholding is a prepayment of tax rather than a separate final tax rate for PTO.

Federal withholding: two methods

For eligible separately identified supplemental wages, an employer may use 22% withholding or the aggregate method. With the aggregate method, payroll combines the supplemental payment with regular wages, then accounts for tax already withheld. Both methods are permitted.

The portion above $1 million in annual supplemental wages is subject to 37% withholding. Only the excess uses that rate. Eligibility and combination-of-payment rules are explained in IRS Publication 15, section 7.

Social Security and Medicare

For 2026, the employee Social Security rate is 6.2% on wages up to $184,500. Wages already paid by the employer reduce how much of a new payout remains subject to that tax. Medicare withholding is 1.45%, plus 0.9% on wages the employer pays above $200,000. See the SSA wage base and IRS payroll tax guidance.

Enter prior wages in the optional fields of the tax calculator to estimate the effect of crossing these thresholds. Leaving them blank assumes zero, which can overestimate Social Security withholding for someone already near the wage base.

State withholding and other deductions

State treatment and employer methods vary. The state rates on this site are illustrative estimates, not a verified current payroll table. Ask payroll which rate and method applies. Local taxes, benefit deductions, and individual payroll adjustments can also change the deposit.

Example: 80 hours at $25 per hour

The gross payout is $2,000. With eligible 22% federal withholding, $440 is withheld. If the entire payment is below the Social Security and Additional Medicare thresholds, FICA is $153. Assuming no state income tax or other deductions, the estimated net is $1,407.

An employer using aggregate withholding, or an employee who has already reached the Social Security wage base, will get a different result. Check the assumptions before treating a difference as an error.

Why a refund is not guaranteed

Your annual return combines taxable income, deductions, credits, withholding, and other payments. A payout withheld at 22% does not by itself establish an overpayment or underpayment. You may receive a refund or owe more depending on the full return.

What to ask payroll

• Which unused hours are payable and at what rate?
• Will the payment be separate from regular wages?
• Which federal and state withholding methods will be used?
• Have year-to-date wages been included when applying payroll thresholds?
• Are any benefit deductions or other adjustments included?

If you are considering a retirement contribution, ask about plan eligibility, contribution limits, and payment timing before payroll runs. This calculator does not determine plan eligibility or model retirement contributions.

Keep the pay stub and leave statement, and use the methodology to compare the estimate with payroll. A gross-pay discrepancy and a withholding-method difference are separate questions.