On Monday, July 6, 2015 at 9:25:04 AM UTC-7, Bowen wrote:
> I am leaving a job to return to school, I have 120 hrs of accrued
> Paid Time OFF that would be paid in one lump sum upon termination.
> Is this money taxed at a higher rate?
It's complicated (this is income tax, after all).
In general, the income from vacation that is paid out is not taxed any
differently than any other earned income you would receive. It is just
additional compensation for your services.
It is possible that the marginal tax rate may be higher if this additional
income puts you into a higher tax bracket, but if you are leaving a job, it
may be safe to assume your earnings for the rest of the year will be lower,
so this is unlikely to apply.
Now the amount withheld from the paycheck will be higher than your usual tax
withholding rate, but that would just affect the amount withheld, and not the
actual tax owed on that money. This can happen for a couple of reasons, one
of which would be that if the amount is just added to your last paycheck, it
may appear that you have a higher income than you actually have, and that will
make it seem like you need to have more tax withheld for that one paycheck.
It may also be the case that the company treats this similar to a bonus payment
and uses the alternate bonus withholding rate. Again, this will just affect the
amount withheld from the paycheck and not the amount you ultimately owe.
If you have excess withholding this may result in you having a larger refund (or lower bill) come next April. This is likely if your overall income will
be lower from not working for the full year.