Final Paycheck · Vacation Payout

Leave Encashment Calculator for US employers

Pay out unused PTO correctly at separation — calculate vacation payouts using your hourly rate, comply with state-specific final-pay rules, and apply correct tax withholding.

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The Formula

Leave encashment = (Last hourly rate) × Unused PTO hours For salaried employees, derive hourly: Hourly rate = Annual salary / 2,080 (assuming 40-hour week) For non-exempt with overtime in the regular rate: Use the FLSA regular rate including bonuses and shift differentials.

State law often controls. CA, CO, MT, ND, NE, IL (effective 2024), and others require payout of accrued PTO at termination. Other states default to whatever the written policy says. Check your state's wage-and-hour rules before issuing the final paycheck.

Worked Example

Example: Salaried employee leaves with 36 hours of accrued PTO, $90,000 annual salary

Annual salary$90,000
Standard work hours per year2,080
Hourly rate$90,000 / 2,080 ≈ $43.27
Unused PTO hours36
Gross PTO payout36 × $43.27 ≈ $1,557.69
$1,557.69 paid out in the final paycheck, subject to federal/state income tax, FICA, and any state-specific supplemental tax rate

When is PTO payout required?

There are three common triggers. First, separation from the company — many states require accrued PTO to be paid out as wages, others let policy decide. Second, year-end if a use-it-or-lose-it policy is invalid in your state — California, for example, treats accrued vacation as wages that cannot be forfeited, so unused balances must be carried over or paid out. Third, voluntary employer policy — some employers pay out PTO over a cap to discourage hoarding.

Which leave types qualify for payout?

PTO and accrued vacation almost always qualify in payout-required states. State-mandated paid sick leave is generally NOT required to be paid out at separation (CA, NY, NJ, and others — paid sick leave is treated differently from PTO). Personal days, floating holidays, and bereavement leave are typically not paid out unless the policy specifies. FMLA leave is unpaid by default and has no payout obligation.

Tax treatment

PTO payouts at separation are taxable wages — they are subject to federal income tax withholding (using the supplemental tax rate of 22% for amounts under $1M, or 37% for amounts above), FICA (Social Security + Medicare), state income tax, and applicable local taxes. PTO payouts also count toward Social Security wage-base accumulation. The payout should appear on the final pay stub and on the employee's W-2.

Final paycheck timing by state

Final-pay timing is state-specific and unforgiving. California requires immediate payment on the day of involuntary termination. New York requires next regular payday. Illinois requires next regular payday or sooner. Texas and most other states default to next regular payday. Late final pay can trigger waiting-time penalties — California's, for instance, runs at the daily rate for up to 30 days. Peoplifi calculates the correct payout amount and timing automatically per state.

Frequently Asked Questions

What is PTO payout?

A cash payout of unused PTO when an employee leaves the company, or as part of a year-end policy in states where forfeiture is prohibited.

What is the formula?

Hourly rate × unused PTO hours. For salaried employees, hourly rate = annual salary ÷ 2,080. Use FLSA regular rate including bonuses for non-exempt staff.

Is PTO payout taxable?

Yes. PTO payouts are taxable wages subject to federal income tax (typically at the 22% supplemental rate), FICA, and state income tax. The amount appears on the employee's W-2.

Do all states require PTO payout?

No. California, Colorado, Montana, North Dakota, Nebraska, and Illinois (effective 2024) require payout. Most other states allow the policy to control. Always check your state's wage-and-hour law before processing the final paycheck.

Skip the spreadsheets

Peoplifi runs these calculations automatically for every employee, every pay cycle — with FBR, EOBI and bank-sheet exports included.

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