When it comes to attracting talent to your business, you know paid time off (PTO) is important. But it might be even more important than you think: Nearly two in three workers in the U.S. would say no to a job that doesn’t offer this basic benefit.

Despite this, over half of Americans have unused PTO left over at the end of the year. That’s where PTO payouts enter the picture. They allow employees to receive money for their unused vacation days, turning them into extra pay. No matter the size of your business, offering PTO and PTO payouts shows your employees—or even employee—that you value their work. 

This article will explain PTO payouts, why they’re important to your business, and how to handle them. We’ll cover the pros and cons, legal issues, and tips for creating a fair policy.

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What Is a PTO Payout?

PTO is a benefit many companies offer their employees. It’s time workers can take away from their jobs while still receiving their regular pay. This usually includes vacation days for relaxation, personal days for handling life’s unexpected events, and sometimes even sick leave. Businesses of any size can offer PTO, whether you employ one person or dozens. 

A PTO payout happens when an employee receives money for unused PTO, instead of taking the actual time off. It’s like turning those unused days into cash.

PTO payouts can be a win-win for both employees and employers. For workers, it means extra money in their pockets for time they didn’t or couldn’t use. For businesses, PTO payouts show employees that their hard work is valued, even when they can’t take all their time off. This can boost morale and make workers feel more appreciated.

But do companies have to pay out PTO by law? As we’ll see later, the answer depends largely on the state you do business in.

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When Is PTO Paid Out?

The biggest factor in determining when PTO is paid out is state laws. Different states have different rules about how and when companies must handle unused PTO. It’s important for business owners to know the laws in their state to avoid penalties and legal issues.

The most common time for PTO payouts is when an employee leaves a company. Many states require businesses to pay out any unused PTO when a worker’s employment ends. This can happen in a number of different situations:

• Quitting. This happens when an employee decides to leave the company for a new job or other reasons. But does a company have to pay out PTO if you quit? Once again, the answer depends on your state.
• Termination. This happens when the company has to let an employee go due to poor performance, budget cuts, or other reasons.
• Retirement. This happens when an employee reaches retirement age and stops working.

But leaving the company isn’t the only time PTO might be paid out. Some businesses handle it differently:

• Year’s End. Some companies choose to pay out unused PTO at the end of each year. This can help prevent a big buildup of unused time. One employee won’t end up with 50 unused vacation days.
• Year-Round. Some businesses allow employees to convert PTO to cash throughout the year. This gives workers more flexibility in how they use their benefits.

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Taxation of PTO Payouts

When it comes to taxes, most states view earned PTO as a form of wages. This means when you pay out PTO, you treat it like regular pay for tax purposes. In the eyes of the law, it’s not a special bonus or a different kind of payment.

As an employer, this means you have some extra responsibilities. You need to withhold the right amount of taxes from PTO payouts, just like you do with regular paychecks.

It’s important to get this right. If you don’t withhold enough, your employees might end up owing money when they file their taxes. If you withhold too much, you’re taking more of their money than you should. Either way, it can create problems and lead to unhappy employees.

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PTO Payout Laws by State

State laws about PTO payouts can vary significantly. In fact, many states don’t have vacation pay laws at all. But even in these states, the employer is often legally bound by their written policy or agreement with the employee instead. Note that the number of employees you have doesn’t affect this. 

So, which states require PTO payouts, and what are the conditions? This table sums up the basic information about vacation pay policy by state, including whether there are vacation pay laws at all, whether there are rules about use-it-or-lose-it policies, and whether the state requires vacation time to be paid out when an employee leaves the company:

State	Vacation Pay Laws Specified	Use-It-or-Lose-It Policy	Payment Required on Separation
Alabama	No	No	Not specified
Alaska	No	No, but vacation pay is classified as a vested right	Not specified
Arizona	No	No	Not specified
Arkansas	Only for state employees	No	Not specified
California	Yes	Prohibited	Earned, unused vacation must be paid out
Colorado	Yes	Permitted with conditions	All vacation pay must be accurately paid out
Connecticut	No	No	Not specified
Delaware	No	No	Not specified
District of Columbia	Yes	No	Not specified
Florida	No	No	No
Georgia	No	No	No
Hawaii	No	No	Not specified
Idaho	No	No	Not specified
Illinois	Yes	Permitted with conditions	Not specified
Indiana	Yes	Precedent for being permissible	Not specified
Iowa	No	No	Not specified
Kansas	No	Permitted	Not specified
Kentucky	No	No	Not specified
Louisiana	Yes	Permitted	Accrued, unused vacation must be paid out
Maine	Yes	No	Employers with 11+ employees must pay for unused PTO
Maryland	Yes	No	Without a written policy, earned, unused vacation must be paid
Massachusetts	Yes	Permitted	Earned, unused vacation must be paid out
Michigan	No	No	Not specified
Minnesota	Yes	No	Not specified
Mississippi	No	No	Not specified
Missouri	No	No	Not specified
Montana	Yes	Prohibited	Earned, unused vacation must be paid out if promised
Nebraska	Yes	Prohibited	Earned, unused vacation must be paid out
Nevada	No	No	Not specified
New Hampshire	No	Permitted	Not specified
New Jersey	No	No	Not specified
New Mexico	Yes	No	Earned, unused vacation is considered wages
New York	Yes	Permitted	Not specified
North Carolina	Yes	Permitted	Not specified
North Dakota	Yes	Permitted	Not specified
Ohio	Yes	Precedent for being permissible	Vacation pay is considered a deferred payment of earned benefits
Oklahoma	No	Permitted	Not specified
Oregon	No	No	Not specified
Pennsylvania	No	No	Not specified
Rhode Island	Yes	No	Accrued vacation must be paid if employed for 1+ years
South Carolina	No	No	Not specified
South Dakota	No	No	Not specified
Tennessee	No	No	Not specified
Texas	No	Yes	Not specified
Utah	No	No	Not specified
Vermont	No	No	Not specified
Virginia	No	No	Not specified
Washington	No	No	Not specified
West Virginia	Yes	No	Not specified
Wisconsin	No	No	Not required to pay upon separation
Wyoming	Yes	No	Not specified

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How To Calculate PTO Payouts

How PTO is calculated works differently, depending on whether an employee is paid hourly or salaried. Here’s a more detailed look at how to do it for each type of worker.

Hourly Workers

First, how does PTO payout work for hourly employees? Here’s the procedure:

1. Find out how many hours of PTO the employee has left. This should be in your PTO tracking system.
2. Multiply that number by their hourly rate.

Example: Let’s say John has 25 hours of unused PTO and makes $20 per hour. His payout would be calculated like this:

25 hours x $20 per hour = $500 payout

Salaried Workers

It’s slightly more complex for salaried workers because you have to calculate their equivalent hourly pay first:

1. Calculate their daily rate by dividing their annual salary by the number of working days in a year. Most businesses use 260 days (52 weeks x 5 days per week).
2. Multiply that daily rate by the number of PTO days they have left.

Example: Sarah’s salary is $52,000, and she has 5 days of unused PTO. Here’s how to calculate her payout:

Daily rate: $52,000 / 260 = $200 per day

PTO payout: 5 days x $200 per day = $1,000 payout

Remember, these calculations give you the gross amount, which is the total before taxes and other deductions. The actual amount the employee receives will be less after taxes.

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3 Tips for Managing Unused PTO as a Small Business Owner

Managing PTO can be tricky, especially for small business owners. Here are some easy tips to help you handle unused PTO effectively:

• Write a Comprehensive PTO Policy. Your policy should clearly explain how PTO is earned, how it can be used, and what happens to unused time. Make sure it covers things like whether PTO carries over to the next year, whether there’s a cap on how much can accrue, and how PTO payouts are handled. Even if you’re running a very small team, you’ll benefit from having a clear policy. 
• Use a PTO tracker. This could be a simple spreadsheet or a more advanced software system. Whatever you choose, make sure it’s accurate and easy to use. Then you know who has used their PTO and who has days left.
• Consider a PTO Donation Program. This allows employees to give their unused PTO to coworkers who might need extra time off due to illness or family emergencies. It’s a great way to foster a supportive work environment.

Business Expense Tracker

Tracking PTO can go a long way toward staying organized and helping employees make the most of their benefits. But what about tracking expenses?

Expense tracking has never been easier, thanks to Invoice Simple. Our business expense and receipt tracker lets you scan any receipt, and we capture key info automatically. All your expense data is ready to export into a summary report whenever you need it.