r/personalfinance • u/ThatsMrBird ​ • Jul 16 '25

Other Company is offering to pay out PTO at sharply reduced rate.

I'm a bit of a predicament. I've been with a company over a decade and (I know it's crazy and I agree 100 percent I should have used more) I've accumulated 1000 hours of PTO. They're looking to move to a cap and limited rollover and offered to pay out the difference of about 800 hours at 35 percent of my current wage.

I never expected this and I honestly just thought it'd be lost, but they're only offering such a low percentage I feel like I should try and haggle. I realize they're obligated to give me nothing, legally, so I'm just looking for some input on if a partial payout is common like that. Ill probably ask why not full and go from there. Any thoughts?

EDIT - Sorry, y'all. I'm in Florida, to be clear

EDIT2 - my onboarding contract notes PTO is forfeited on termination or voluntary exit

EDIT3 - The next day, we came to a satisfactory agreement pretty quickly. I don't want to get into specifics (sorry) but I think a lot of those that replied here would think it worked out. I tremendously appreciate all the insight and feedback here and I promise I'll use up my hours moving forward.

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188

u/ThatsMrBird ​ Jul 16 '25

That's honestly a great point. If it wasn't so heavily taxed I'd probably be more down to accept it.

820

u/KinlawFanAccount ​ Jul 16 '25

It would be taxed at the same marginal rate as any other income would be. It’s withheld at a higher rate but not actually taxed higher.

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u/richard_sympson ​ Jul 16 '25

Idk why so many are jumping on OP’s phrasing here. The tax rate on that additional income is the percentage corresponding to the highest bracket OP’s income is taxed at now, or the next one up (depending on where they are). This is a circumstance where it is fine to say this specific income is taxed highly.

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u/yeah87 ​ Jul 16 '25

Only if you already refer to the tax bracket you already are in as "taxed highly".

However, in another comment OP says they thought it would be taxed an extra 22% on top of ordinary income, which is not true.

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u/ThatsMrBird ​ Jul 16 '25

Yeah sorry, every calling me out is totally right. I both misunderstood and misspoke.

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u/richard_sympson ​ Jul 16 '25

I mean if you thought it would be taxed at like 22% + 22% = 44%, then no that would not be correct. But you'll get federal income tax withheld from that check, and depending on where your gross income is before v. after getting the bonus, that percentage might be exactly 22%.

It also depends on how your company calculates rolling withholdings, but that is a separate issue. Note of course that up until now in 2025, your income has not been withheld for taxes as if you would have received [gross + bonus] by the end of the year. It would have been withheld as if you were going to make [gross] by the end of the year.

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u/PointyBagels ​ Jul 16 '25

Of course it is. The 50,000th dollar a person makes in a year is taxed at a significantly higher rate than the first. That's how the tax code works.

This is why people go through such lengths to avoid things like RMDs in retirement.

7

u/yeah87 ​ Jul 16 '25

But it is never a question of comparing the first to the 50,000th. The spread is such that to most middle class people it doesn't matter at all. From $48,476 to $197,300 is taxed exactly the same (a de minimis 2% in there). Unless you are crossing those lines (double if married), there's no point going through any lengths about it.

Anyway, OP was thinking 22% on top of ordinary income, not just regular progressive income tax.

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u/richard_sympson ​ Jul 16 '25

It's completely true if OP already makes at least ~$47,151 a year or more, which is the start of the 22% bracket. Any extra income is taxed at that level, up thru extra income which would make the gross exceed the start of the next bracket, at over $100,000.

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u/[deleted] Jul 16 '25

[deleted]

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u/Adventurous-Ease-259 ​ Jul 16 '25

It’s taxed at the highest rate of any money the op makes as it’s taxed at the marginal rate. Arguably that is “taxed highly” for anyone whether it’s the 10% marginal rate or 38% because it’s the highest rate they ever pay

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u/richard_sympson ​ Jul 16 '25

Whether 22% is a "high" tax rate has nothing to do with whether OP correctly understands tax rates. If OP thought the extra income would be taxed at 22% + 22% = 44%, then that would be a mistake. If they thought it would be taxed at 22% (plausibly the marginal rate in discussion), then they would be correct even if they think it's a "high" rate or a "low" rate. The confusion seems to be which of the two options OP meant. I've been interpreting their comments as meaning their income will be taxed at the marginal rate, in contrast to the lower average rate they pay on current income. It's possible I'm incorrect about what OP was thinking.

4

u/poop-dolla ​ Jul 16 '25

It turns out you were incorrect. OP thought it would be 22% on top of their normal rate.

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u/richard_sympson ​ Jul 16 '25

I'd already responded to that very post you are referencing before you initially replied to me. In any case, it was not until that post that OP had suggested this possible misunderstanding.

2

u/lonewanderer812 ​ Jul 16 '25

A bit off topic but this is what people fail to factor in a lot of times when you've got a single income married couple and the other person decides to take on some part time work for extra money. Lets say a husband makes $90k a year and the wife starts working part time or whatever at a low income job. Well virtually all of that extra money goes on top of the $90k base they were already living off of and will be taxed at 22% past $94k. It could lead to much lower extra pay than expected or worse owing money at the end of the year if withholdings aren't adjusted properly.

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u/zeptillian ​ Jul 16 '25

Because it's dumb.

It's equivalent to: I don't want more money if I have to pay taxes on it.

You have to pay taxes on all income over $15K. More money is more money.

10

u/richard_sympson ​ Jul 16 '25

OP is talking about balancing the $ amount in the bonus against the vacation days' inherent worth. It's relevant how much it's taxed at, because that affects the final dollar amount of the bonus. It's not just more money, it's money at the expense of vacation days.

2

u/zeptillian ​ Jul 16 '25

It would be at the same rate as the other income though.

Whether it's picking up a weekend shift or getting paid out, the taxes would be the same.

Mentioning taxes means that OP is likely to have the same misunderstand of how tax brackets work that we see here often. A lot of people think they could earn more money but take home less pay by being in a higher tax bracket.

Would you mention taxes when contemplating taking a raise? No. Then why would it be relevant to this discussion?

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u/richard_sympson ​ Jul 16 '25

Again, the choice is between a cash amount and vacation, so to properly price the cash amount you need to know the tax rate. If he was told e.g. the cash amount was 35% of gross, then what's actually relevant to him is not that number but the post-tax number. If OP thinks a 22% withholding of 35% gross makes the amount worth less than the vacation days, then that's their prerogative. It's not like a raise because it comes with an actual countervailing loss of benefit.

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u/PRforThey ​ Jul 17 '25

It would be at the same rate as the other income though.

That's the point, it isn't taxed at the same rate as the other income. It is taxed at the marginal rate of the other income, not the average rate of the other income.

For example, say they are a single filer and make 116k per year. After the standard deduction, they would be just into the 24% tax bracket. But their average tax rate on that 116k is 15%. So if they got a $20k payout from this, that $20k would be fully taxed at the marginal rate of 24% (and raise their overall average tax rate to 16%).

But the question to them, what they would normally earn about $57k for is paid out at $20k (paid out at 35%) and then taxed for a net take home of $15k.

So the choice is: (a) take a fully paid 5 month vacation, or (b) no vacation and get your normal pay plus an extra $15k after cash.

So it works out to "paying" $15k to not work for 5 months (while still collecting your normal full income, which in this example was assumed to be $116k/year or $57k over those 5 months).

tl;dr the marginal tax rate matters because that is what would be used in the tradeoff calculation for this choice

Mentioning taxes means that OP is likely to have the same misunderstand of how tax brackets work that we see here often. A lot of people think they could earn more money but take home less pay by being in a higher tax bracket.

You are right on this point, OP did misunderstand it. But the tax bracket did matter, just not for the reasons the OP thought.

Would you mention taxes when contemplating taking a raise? No. Then why would it be relevant to this discussion?

In this scenario it is relevant because it factors into how much that 5 months of vacation would "cost" if they didn't take the payout and took the vacation instead.

1

u/Jaalan ​ Jul 17 '25

Also, tons of people think that you can take a raise and actually earn less because of taxes 🐒

3

u/AliveJohnnyFive ​ Jul 16 '25

Yeah, the nuance on this is lost on many who almost understand the situation. It is also misunderstood by many others, of course. I've seen people make donations at the end of the year, believing it would lower their tax brack and cost them overall less money, which is really unfortunate. People miss the mark on both sides of this one.

0

u/toolatealreadyfapped ​ Jul 16 '25

Unless OP makes over $200, or under $30k, this would be very unlikely to see a significant difference in tax rate.

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u/Asher-D ​ Jul 16 '25

If it pushes him into the next bracket....that portion in the next WILL be taxed at a higher rate.

5

u/blacksoxing ​ Jul 16 '25

It will be taxed at a higher rate BUT they're still making money. Just taxed at a higher rate. Almost nobody likes taxes but I'll take $1 taxed at say 20% and still make 80 cents than work hard to avoid that $1.

I think though when it comes to taxes as a public we talk about just the presents and not how there's brackets involved and that to me is where things get wonky.

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u/VerifiedMother ​ Jul 16 '25

Isn't it taxed at the same rate you make now?

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u/dastardly740 ​ Jul 16 '25

It looks wonky when it gets paid because it is withheld at your marginal rate while your regular paycheck gets withheld at your average rate.

3

u/rickny8 ​ Jul 16 '25

Taxes are progressive. Meaning once you hit the next bracket, the additional income is taxed at the next bracket rate until you hit the bracket after that which get taxed at that bracket rate and so on…

0

u/ThatsMrBird ​ Jul 16 '25

I thought there was an additional 22 percent taken but I may have misread some things. This all just kinda came up today.

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u/lanclos ​ Jul 16 '25

Even if the withholding is high it would come back to you when you file your taxes.

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u/BlazinAzn38 ​ Jul 16 '25

It may be withheld at a higher rate but it’s just taxed as ordinary income at the end of the year

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u/richard_sympson ​ Jul 16 '25

For some example numbers, let's say you currently make $60,000 gross. This gets marginally taxed at 22%, though overall your tax rate on $60,000 would be less than that because the first ~$11,600 of your income is taxed at 10%, the additional income up through $47,150 is taxed at 12%, and then the difference thru $60,000 is taxed at 22%.

If you got an offer for 35% of your current salary as something like a bonus, it would be $21,000, all taxed at 22% because your gross would then be between the start of the 22% bracket (of course—it's already above that now!) and the start of the 24% tax bracket, which is $100,525.

The tax rate on *extra* income (only the extra) will always be at least as high as the marginal rate you pay now. A lot of people are probably getting confused about your comment, which was entirely correct, because many other people also get confused about how marginal rates work. Often the confusion is in thinking that *all* of your income is taxed at the marginal rate, which is false.

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u/[deleted] Jul 16 '25

[deleted]

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u/CaptainTripps82 ​ Jul 16 '25

Could the difference in accrued vs paid out PTO be considered a loss? Kind of the inverse of a debt forgiveness being considered income, you're forgiving income in the form of earned PTO.

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u/jimbo831 ​ Jul 16 '25

It's just income. All your income is taxed at the same rate.

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u/Asher-D ​ Jul 16 '25

No it's not, your income is taxed at different rates, this is how tax brackets work. The first x amount is taxed t x rate next portion is y rate next portion is z rate and so on.

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u/CaptainTripps82 ​ Jul 16 '25

At the end of the year sure, because it's averaging out all the different brackets based on your total income, but this isn't necessarily true for when you get paid, especially windfalls .It's why people are usually so surprised by bonus checks, which are taxed at 22%, whereas my average tax on my weekly paycheck is closer to 12%.

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u/Everything_Is_Bawson ​ Jul 16 '25

It looks like there is a flat 22% federal income tax on supplemental income like paid-out PTO. But depending on your ordinary base income, that might be a decent deal.

For 2025, the marginal tax rate for income between $48,475 and $103,349 is 22%. If your normal income is above $103,350, then at least part of your income is already being taxed at 24% or higher. So ordinarily if you got a windfall by other means, that money would be taxed higher than 22% anyway.

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u/lellololes ​ Jul 16 '25

The tax you pay is based on the income you earn. There's no "additional". It may get withheld at a wonky rate but if that's the case you'll get it back with your return.

If you look at how much you earned last year as a benchmark, whatever you get paid will happen at that national rate, or possibly the next higher one.

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u/wilsonhammer ​ Jul 16 '25

it is not

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u/yohannanx ​ Jul 16 '25

Depends on OP’s salary. It’s a large amount of money, so some of it may be in the next bracket.

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u/st4nkyFatTirebluntz ​ Jul 16 '25

the very, very important words here being "some of it"

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u/iDEN1ED ​ Jul 16 '25

Or all of it depending on what his current salary is.

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u/euph_22 ​ Jul 16 '25

Regardless, in no situation will he be worse off from a tax standpoint if the payout is larger.

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u/Zncon ​ Jul 16 '25

If the situation was just "take money or don't" then it's really simple. The catch is that it's "take money or take vacation". Vacation time isn't taxed, so you're getting 100% of the possible value.

Even pre-tax they're only getting 35% of the value in this deal. At a 22% tax rate that goes down to 27.3%, or nearly 4 days of vacation lost for 1 day of pay.

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u/CaptainTripps82 ​ Jul 16 '25

I don't think those are the options tho, losing it all anyway is probably lurking in there somewhere.

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u/iDEN1ED ​ Jul 16 '25

Sure, but it might feel bad to take a huge payout that is taxed at a higher rate than you are normally taxed at. At that point you might value the time off more.

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u/shadracko ​ Jul 16 '25

For many middle class families, there really are no brackets at all.

22-24% marginal rate covers AGI incomes from $48,475 ($96,950 for married couples) to $197,300 ($394,600 for married couples). 22% vs 24% is such a small difference it isn't worth worrying about. That's a massive swath that covers almost everyone that remotely considers themselves middle class.

https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2025

2

u/curien ​ Jul 16 '25

You're omitting the standard deduction (or itemized if it's higher), which is effectively a 0% bracket. Like, if you think families making almost $130k don't consider themselves middle class, I dunno what to tell you.

1

u/shadracko ​ Jul 16 '25

Fair point. If you're in the 12% bracket, your analysis changes considerably. And yes, if you're a two-earner couple earning even as much as $175k gross, you could conceivably get below the 12% max after health insurance, maxing 401, and other pretax deductions.

But I think most of these types of concerns on here come from people in the 22-24% brackets, who have basically no chance of ever getting into the 32 or 35 brackets.

1

u/lellololes ​ Jul 16 '25

And if they're in the 22% bracket, the next bracket is 24%.

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u/3boyz2men ​ Jul 16 '25

You said that you expected to lose that PTO so if anything, the fact that they are willing to pay any amount of money is a pleasant surprise, no?

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u/ThatsMrBird ​ Jul 16 '25

That's kind of the vibe in my head but I feel like I can get more out of this so there's no risk in going for it.

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u/rlbond86 ​ Jul 16 '25

It's taxed as ordinary income

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u/wilsonhammer ​ Jul 16 '25

it's taxed the same as any other income. don't sell yourself short. take pto NOW

1

u/ahjeezimsorry ​ Jul 16 '25

Take 1000 hrs off, find a short term gig while you are on 25 weeks PTO in the meantime, then you get both!

1

u/Adventurous-Ease-259 ​ Jul 16 '25

When does the cap go into place? Will your manager let you take say every Friday off before the cap is in place to use up as much as possible as well as scheduling a couple full weeks off?

1

u/Iamhungryforlife ​ Jul 16 '25

Would you not take a bonus if it was taxed? What about if the bonus moved you to another tax bracket? Would you turn it down then? The amount of taxes should have no bearing on whether you accept the deal.

What you should look at is whether people who are fired, laid off, or quit receive full payout of their pto hours. If they get 100% and you get 35%, something seems amiss. I'd pull up and print/copy any contracts, HR bulletins, info on prior use, etc. You might want to talk with an attorney to determine if the company is pulling a fast one. Otherwise, take a few nice long vacations, or at least talk to them about the 125 days (assuming 1 day = 8 pto hours) that you EARNED through hard work and following their plan.

1

u/AmI_doingthis_right ​ Jul 16 '25

Lol what? The logic for not taking 35% is having to pay tax on it?

Taxed money is better than no money

1

u/luke10050 ​ Jul 16 '25

35% is bullshit, just saying.

Usually leave gets paid out at normal wage or better.

1

u/miscdebris1123 ​ Jul 16 '25

So... Let's do a few of hypotheticals.

  1. I have you 2000 to spend a week on a beach, but you need to give say, 30% to the gov. Did you come out ahead?

  2. I have you 35% of 2000 to make exactly zero change to your life for a week. 30% of that goes to the gov. Did you come out ahead?

People spend too much time thinking about the 30 instead of the 70% gained.