PTO payout: What is it and how does it work?
manage employees

PTO payout: What is it and how does it work?

While not always required, paid time off (PTO) is a benefit that can be instrumental in attracting and retaining employees. In fact, our PTO survey found that 29% of people would turn down a job immediately if they weren’t offered any PTO. 

But what happens when PTO goes unused? PTO payout or PTO cash out is compensation for unused accrued vacation time when an employee leaves a company

Our guide covers everything you need to know about PTO payout, so you can ensure your business is staying compliant with PTO payout laws and managing unused employee time off effectively. 

How does PTO payout work?

An illustration explaining how pto payout works

PTO payout can work a couple of ways, but some states have specific laws that determine how employers should handle it. The two laws regarding PTO payout include:

  1. Employers are required to pay terminated employees any unused PTO in their final paycheck.
  2. At the end of the year, employees “use it or lose it” and can’t carry over any accrued PTO to the following year.

Depending on your state’s laws, you may be able to do a combination of one and two. Any other payout-specific requirements must be outlined in your PTO policy and employee handbook. For example, allowing employees to cash out vacation time at the end of the year—though there is no law requiring employers to do this.

How do PTO payouts work with unlimited PTO policies?

If your small business has an unlimited PTO policy, you do not need to pay out unused PTO at the time of termination, since unlimited vacation time isn’t accrued or considered an earned wage.

PTO payout laws by state

At the time of termination, some states do not require employers to pay their employees for any unused vacation time. However, employers need to follow through with payment of accrued time off at termination if such a rule was outlined in the employee handbook and contract.

Below is a breakdown of PTO payout laws by state, which includes the states that require PTO payout, the ones that don’t require PTO payout, and the states that prohibit employers from implementing a use it or lose it PTO policy.

PTO payout by state with a map of the US

Am I required to offer my employees PTO? 

No. There are no federal or state laws that require you to offer paid vacation to your employees. However, most employers do offer this employee benefit to attract and retain talent. It’s important to check your state laws to determine any laws around offering paid time off outside of vacation, such as sick days. There are many different types of PTO that you may offer employees, including:

  • Sick time 
  • Vacation
  • Personal (doctor’s appointments, mental health days, etc)
  • Holidays 
  • Maternity and parental leave
  • Jury duty
  • Bereavement 
  • Sabbatical 
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4 Tips for handling unused PTO 

Here are a few ways you can handle unused vacation time to keep your employees happy and your business running smoothly. 

1. Establish a PTO policy 

The most important aspect of properly handling unused vacation time is having a time off policy set in place. Before employees request time off or decide how they want to roll over their unused time, they need to understand how they can use this benefit and what is expected of them. 

Your employee time off policy should include: 

  • How many vacation days your employees get each year. 
  • What employees can use PTO for, if necessary (e.g sick leave, vacation, jury duty). 
  • How employees accrue PTO and what happens if it goes unused. 
  • How to get PTO approved. 
  • How far in advance to request time off. 
A list of things to include in a PTO policy

2. Clearly outline your PTO payout policy in your employee handbook

Once you have your policy set in stone and have ensured you’re staying compliant with your state's laws, you’ll want to include your vacation payout policy in your employee handbook so your team has it to reference. In addition to adhering to state laws, make sure your business policy on PTO payout is clearly outlined. You should structure these policies in a way that’s easy to digest to avoid any confusion. 

If your business has multiple locations in different states or has remote employees in different states, you’ll also want to include each state-specific law in your policy.

3. Stay on top of requests with a PTO tracker

A PTO tracker can help your business stay on top of your time off policies and help you track and manage your employee’s leave all in one place. 

Our PTO tracker makes it easy for employees to submit time off requests and keep track of how much PTO they have left, while also helping to prevent miscommunication, missed shifts, and payroll errors.

4. Encourage time off

Though some states don’t require employees to use their PTO by the end of the year, some have a use it or lose it policy that states otherwise. Our PTO survey found that 60% of employees had leftover paid time off at the end of the year

If employees don’t feel comfortable requesting time off, their earned PTO hours could be left on the table. Make sure to encourage your employees to take their time off so PTO hours don’t go to waste. Employees should feel comfortable requesting time off, and you should remind them to use this benefit to take some much-needed rest when they need it. 

Know the answers to common PTO payout questions

PTO payout can be confusing, which is why knowing your state laws and regulations is important. Here are some answers to common PTO payout questions you may be asking yourself. 

Can you cash out PTO?

By law, some states require employers to pay employees for their unused PTO hours should they leave the company. For those still employed, companies are not required to pay employees for unused PTO hours, but they may allow employees to roll over unused vacation time to the following year. Make sure to check your state’s laws for specific guidelines on whether or not you’re required to cash out an employee’s PTO at termination. 

What’s the difference between PTO payout and use it or lose it PTO?

PTO payout is when an employer pays an employee for unused vacation time either at the time of termination or at the end of the year. Use it or lose it PTO is when an employee will need to use their accrued PTO hours by the end of the year or they lose out on those hours and will not be compensated or able to roll them over into the following year. 

Some employers may have a use it or lose it PTO policy, however, a few states prohibit employers from implementing this policy, including California, Montana, Colorado, and Nebraska. 

Does PTO payout get taxed?

Yes. Since the IRS considers PTO payouts as supplemental wages, these funds are subject to tax withholdings. Supplemental wages are any wages outside of an employee’s regular pay. This can include bonuses, commission, severance pay, back pay, and payment for unused PTO. 

Manage employee time off with PTO tracking

Managing employees’ time off requests can be easy once you have a proper PTO policy set in place. Stay compliant with PTO payout laws and start using QuickBooks Time today to better manage employee time off requests, stay on top of their accrued PTO, and give them easy access to your business’s PTO policy.

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