- April 7, 2024
- Posted by: legaleseblogger
- Category: Related News
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# Request for Advice on Cash Out Options for PTO in California
Hello PF,
I am currently in possession of two hundred hours of Paid Time Off (PTO) that I am considering cashing out. My employer allows for PTO to be converted to cash at a rate of $1 per hour of my regular hourly rate, which is a beneficial option. However, I am unsure about potential tax implications if I were to cash out all of my PTO at once. I am wondering if there are any limitations or considerations I should be aware of to ensure I do not end up in a higher tax bracket.
Given that I reside in California, a state known for its unique tax laws, I am particularly interested in understanding the best approach to maximize the value of my PTO cash out while minimizing tax liabilities. Any insights or advice on this matter would be greatly appreciated.
Thank you for your assistance in advance.
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May I suggest cashing it out after you receive a raise? It will be worth more. Just an idea.
Cash in half of it, and use the money to fund a nice 2+ week vacation with the rest of the time.
Seriously, tho. Use your vacation time.
Most payroll software will withhold taxes based on the gross income for the pay period, as if you were earning that much *every* pay period for the year. So if it’s paid out all at once there will probably be way too much withheld for taxes, which you won’t get back until you file your tax return next year. In that case it would be best to cash in via small increments.
If you have access to a 401(k) at work and are not already maxing it out, you could up your contributions to offset the extra income. Basically same money, but extra tax free retirement savings.
I had like 150 from a previous job that got paid out all at once when I quit. It’ll get taxed like a bonus so basically if you get paid 26 times a year, your company will withhold it as if you were making 2.5 times what you actually do (hourly rate * 200 vs the normal hourly rate *80). You’ll get the difference back when you file.
How much you make annually determines where this falls on tax brackets. It will theoretically cause you to have a portion of your income up a tax bracket and then a portion of that bonus will get taxed at a higher rate, but it’s probably fairly insignificant. Your only other option is do half now and half in January which will mitigate that slightly.
Let’s say you are single and make $100525 (top of 22%). 200 hours would be $9665. That additional $9665 would be taxed at 24% because it would put you above the 22% threshold. So $2391 coming off of that. But let’s say you make $90k/year and your payout is the same (it wouldn’t be cause hourly rate but for maths sake let’s keep it). You’d keep yourself under the 24% so your entire bonus would be taxed at 22%. $2126 in that case.
Tax brackets really escalate over 170k single, 340k couples. If you’re below that I wouldn’t even think about it. It’s the difference in *at most* $200 or so in federal taxes assuming you’re making over like $45/hr. Even less below that
I hope you know that getting some incremental bonus from cashing out PTO can never put your entire salary into a different tax bracket.
As long as you understand that, you can plan how much to cash out based on whether you are at all close to the next tax bracket boundary. If you are not, then it pretty much doesn’t make a difference.
For example, if your PTO is worth perhaps $15,000 cashed out at your salary rate, but your salary is somewhere in the middle between $94,300 and $201,050 (the federal 22% tax bracket), then your PTO is taxed at exactly the same rate as your current salary.
Even if you’re at the top of that tax bracket, if you cash out the PTO and some of it goes into the 24% tax bracket, you’re only owing 2% more tax on the part that goes over the boundary. Or, you could space out the cashout so that you save some cashout until next year to stay under the next bracket. However, I doubt it’s worth waiting to save 2%.
Why on earth aren’t you using it?
Go enjoy life brother.
Freaking take a vacation. Nobody at 80 says “glad I cashed out that PTO “
If you delay, just be aware that some companies change the payout ratio without notice. Had this happen before they went from 1:1 -> 1:1/2. I say if you can afford it, max out your 401k contributions, get pay raise, then cash out PTO.
taxes withheld is not the same as taxes owed
>*would it be smarter to do it in little batches so I don’t exceed a higher tax bracket.*
Your gross income is going to be the same either way at the end of the year.
Remember, graduated taxes are a thing. You don’t get taxed a flat rate – you get taxed differently for each step. As a totally made up example, let’s say for the sake of simplicity that you make 100k a year. You might be taxed nothing in the first 20k, 20% on 20-80k, and 30% on 80-100k. You’re not taxed 30% on the entire amount just because you made 100k.
That example is totally made up and does not refer to actual tax rates. You would need to look those up on your own.
That said, you might get a larger refund at the end of the year if you do it all at once, because usually a laycheck “pretends” that the amount you’re getting paid is what you would get paid every paycheck… So they might take more out for taxes on a larger amount than they would if you did it slowly – you would still get back the exact same in the end though,
If it’s cashed out in the same year it doesn’t matter.
It doesn’t matter. Cash it out at once if you want. It all equalizes come tax time. You may get taxed at a higher bracket initially for cashing it all out but when you file your taxes, it’ll correct for it.
why not just use it to make holiday weekends longer?
Using it is always more valuable than selling PTO.
Oh lucky you, my company just announced a change away from PTO and I get to just flush my 200 hours down the toilet… I guess that’s what I get for living in Florida.
Several years ago, my work changed the way vacation accrued so they paid out 4 weeks plus my regular pay all in one week. I changed my W4 to 9 dependents for that week and had very little withheld. If you do this, don’t forget to change it back the following week.
Why don’t you just use it? Take off every Friday in the summer, have four day work weeks.
I would do it in increments and not the whole 200 hours at once.
Do you have paid sick time? If not, it may be worth hanging on to in case something happens.
You will owe the same amount of taxes at the end of the year. It might withhold more initially but when you do taxes it’ll come out to the same number of total dollars paid whether you do it all at once or a little at a time.
If your expected salary increases are larger than the expected returns of a long-time investment in the stock market, delay cashing out as long as possible. I don’t know anything about California’s tax code but I would guess that your salary increase is bigger than the possible marginal tax cost.
I would not cash any out. I would use the PTO. PAID TIME OFF. That is a benefit your work offers. No one should feel they can’t take it all. If they don’t want employees to use it, they shouldn’t offer it.
Use it and take a vacation, even if you don’t go anywhere. Just take 40hrs and stay home for a week and enjoy life
This may not be an issue if you’re hourly but a previous employer screwed me by counting my vacation against a calendar month. I had saved up 30 days of vacation, and surprise, you don’t need to take vacation for weekends so 30 BUSINESS days of vacation is six weeks. But my employer said, “Well that’s a month so you’re getting a month’s paycheck.”
Word of advice: If you are saving up PTO before leaving a job, familiarize yourself with how they pay it out. It may not be in your favor to take it all as pay.
Use your time off. It’s worth more than an hour of your wage. Think about it: Even if you don’t use it for actual rest (which I recommend you do), each hour of PTO is worth whatever your wage is PLUS an hour of time you don’t have to be at work. You could theoretically take 8 hours PTO and then go drive for Uber during those 8 hours. Making your normal wage plus whatever you bring in from Uber. Again, I DO NOT recommend doing this because time off is critical, even if your top priority is productivity.
TLDR: You are short changing yourself by cashing out PTO 1:1.
1. Use your vacation.
2. Use your vacation.
3. Use your vacation.
4. Cash out half, at most.
5. Use your vacation.
I waited until I retired. My salary was the highest at retirement. Annual & sick leave combined was over 800 hours. Government job. I had a large portion rolled into my deferred compensation to reduce taxes.
If there’s no limit to how much you can accrue, I’d keep it on the books. It will appreciate as your pay increases. If you ever leave your company, you just go on vacation for several months and get regular pay checks. At my old company, you accrue leave even if you’re on leave, so you wind up with a few extra days.
Before I left my long term employer, I maxed out my vacation figuring I could use the money incase my new employer didn’t work out and I ended up unemployed. I could use the money to cover some bills. I got taxed out almost 50% of the money I was to receive. Oh that hurt, I should have just taken the time off. So, yes cash half and go enjoy.
Spreading it out over several years may help if you would otherwise move into a different state or federal tax bracket. All at once could help if it would push you over the FICA tax limit. If you provide a more detailed explanation of your tax status and income you can get a more targeted answer.
If you are taking the money, might be good to wait for a raise like others have said.
Though taking the money means 30-50% (idk your rates) dissapear to taxes. Taking it as time off means you get 100% of it. I don’t know your circumstances, and money might be worth more than 2x the time to you right now. Just a thought!