Paid Time Off and State Regulations

Many employees delay using their accrued time off, and so firms have rewritten their paid time off (PTO) policies to allow unused days to roll over into the next year.

Does your state require employers to pay out PTO? If your company has locations in many states, you need to review all statutes regarding separation pay. Still, it's wise to check state departments of labor for specific guidelines. Every state has its own PTO laws, and they can vary widely.

Another problem is that you may inadvertently create tax consequences through PTO cash-out options and PTO donation policies. When employees are given a choice between cash and PTO, employees are treated as constructively receiving cash whether or not they exercise that option. The tax system views it as receiving cash. Depending on your local laws, you may be obligated to withhold payroll tax.

Allowing employees to donate unused days to other workers triggers tax rules that require the individual who earned the PTO to report the income, even though he or she didn't receive it. But the IRS says if you donated your PTO for medical or major disasters, then the employee who receives the PTO has taxable compensation.

Paid time off is used to attract and retain talent. Don't let any inadvertent regulatory or tax consequences neutralize any good business effect.

For more tips on PTO and other ways to increase business efficiency, make sure to download our 6 Pillars of Payroll checklist below!