Cash out or roll over PTO: What are the tax implications?
Q. Employees who don’t use all of their paid time off (PTO) lose it at the end of the company’s fiscal year. Management wants to amend this policy to give employees the option of selling back their unused PTO days to the company at their current pay rates or rolling over the PTO days into the next year. Before Payroll gives its final OK to this plan, we’d like to know if we’re missing anything.
A. Of course, employees who cash out their PTO days will be taxable on the cash.
But there’s a trickier problem. Under the doctrine of constructive receipt, employees who are given the choice of receiving a benefit or cash are immediately taxable on the full value of the benefit. So employees who choose to roll over their PTO days into the next year would be immediately taxable on the entire value of their PTO days.
About your only option would be to eliminate the choice and just allow employees to roll over their unused PTO days. Then they would be taxable on the value of the days as they use them.