If you are an employee who is entitled to vacation time, you may wonder if your vacation payout will be taxed at a higher rate than your regular income. The short answer is no, but let’s dive into the details.
What is Vacation Payout?
Vacation payout, also known as vacation pay or vacation time, is the amount of money an employer pays to an employee for unused vacation days. This payment is usually made when an employee leaves a company or at the end of a fiscal year.
Is Vacation Payout Taxable?
Yes, vacation payout is taxable income. However, it is taxed at the same rate as your regular income. The IRS considers vacation payout as wages and taxes them accordingly.
How Is Vacation Payout Taxed?
Vacation payout is subject to federal income tax, Social Security tax (FICA), and Medicare tax. Your employer will include your vacation payout in your W-2 form at the end of the tax year.
Federal Income Tax
Your federal income tax depends on your total taxable income for the year. If you receive a large amount of vacation payout, it could push you into a higher tax bracket and increase your federal income tax liability.
Social Security Tax (FICA)
Social Security tax (FICA) is a payroll tax that funds Social Security benefits for retirees, disabled individuals, and their dependents. In 2021, the FICA tax rate is 6.2% for employees and 6.2% for employers on wages up to $142,800.
Medicare Tax
Medicare tax funds healthcare benefits for retirees over age 65 and individuals with certain disabilities. In 2021, the Medicare tax rate is 1.45% for employees and employers on all wages.
Conclusion
In conclusion, vacation payout is taxed at the same rate as your regular income. It is subject to federal income tax, Social Security tax (FICA), and Medicare tax. If you have any questions about how your vacation payout will be taxed, consult with a tax professional or your HR department.