When employees leave their job, they may be entitled to receive vacation payout for any unused vacation time. However, it’s important to understand how vacation payout is taxed.
What is Vacation Payout?
Vacation payout is the amount of money an employee receives when they leave their job and have unused vacation time. Depending on the company’s policy, employees may be able to cash out their unused vacation time when they resign or retire.
How is Vacation Payout Taxed?
Vacation payout is considered taxable income by the IRS and is subject to federal income tax withholding. In addition to federal taxes, state taxes may also apply depending on where you live and work.
Lump-Sum Payment
When receiving a lump-sum payment for unused vacation time, it’s important to note that the IRS requires employers to withhold a flat 22% for federal income tax. This means that if an employee has $1,000 in unused vacation time, their employer will withhold $220 for federal taxes.
Regular Paycheck
If an employee receives their vacation payout as part of their regular paycheck after leaving their job, the amount will be subject to regular income tax withholding based on the employee’s W-4 form.
When is Vacation Payout Taxed?
Vacation payout is taxed in the year it was received. For example, if an employee resigns in December and receives their vacation payout in January, it will be taxed in January of the following year.
Final Thoughts
It’s important for employees to understand how vacation payout is taxed so they can plan accordingly. Make sure to consult with a tax professional or use a tax calculator if you have questions about your specific situation.
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