[author: Jo Ellen Whitney]
To pay or not to pay and how to pay, while not on Hamlet's mind, are some of the questions that employers frequently face when looking at accrued paid-time off. For many employers, long-term accrual of PTO may result in a significant debt burden on the company. PR is a factor as well. Employees may view PTO as a benefit subject to change and employees feel that the PTO is a wage earned.
There are a wide variety of Department of Labor (DOL) issues that relate to the payout of Paid Time Off or whether or not Paid Time Off can be withheld if an employee terminates or terminates without proper notice. However, an issue has resurfaced based on additional guidance from the Internal Revenue Service regarding the "selling" or paying out of accrued PTO to employees. Pursuant to this statutory interpretation wages paid out as part of a PTO sellback would not in fact be considered wages. They would be calculated as "supplemental wages" and it would be incorrect to treat them as normal wages for the purposes of withholding. A PTO "sellback" would be treated as a bonus and would be issued as payment in the same manner that the company would issue a bonus check. Rates for withholding on a bonus are generally different than withholding on a normal wage. If the bonus is under a million dollars the rate is typically 25%, if the bonus is over a million dollars, the rate is 35%. If someone has more than a million dollars in accrued PTO you need to revise your policies. Such PTO sellback payments would also have to be issued separately from the normal wage paycheck in order to account for these differences and to show that it was not treated as a normal wage. Employees who may be banking PTO with the anticipation of selling it back are probably unaware of these potential tax issues and the fact that they may receive less than they counted on in a PTO payback. Another issue which can blindside employees are those related to PTO "giveaways". If you have a program where employees can "gift" their own PTO to a co-employee the IRS regulations can be problematic. If there is no underlying "qualifying event" such as a reason under the FMLA donated PTO will be taxed to both the recipient and the donor, effectively donating part of your vacation time to the IRS.