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Can an employer classify accrued vacation time paid out in a lump sum as a bonus causing a 40% tax?
Anonymous9 views3 answers
I work at a large hotel in Georgia (USA) that was recently sold to another management company.They allowed for employees to accrue vacation for years and it was to be paid in full on the last paycheck.It was classified as a bonus and it was taxed 40% causing all employees to lose any money they actually earned in regular hours as well as losing vacation pay or all of it.We were never told about this.Personally, my federal income tax increased 1300% because I am in such a low tax bracket that the federal government usually withholds nothing if not a few dollars per paycheck.For example, $9 total was withheld for the tax year of 2013.If it is legal to tax this much for vacation (bonus) does this apply to me since I am in such a low tax bracket?
Fortunately, the rate at which an employer withholds tax is not necessarily the rate at which a taxpayer will eventually pay on his or her tax return. There is a good chance that once you file the 2014 return next year, you may find that they withheld too much, and you will receive a refund. So, the answer is there is nothing illegal about what they employer has done.
When you terminate employment and your accrued vacation is paid out it is classified as payroll. If it is paid out in a separate check in addition to your final payroll check it may be classified as a bonus check, but as my colleague pointed out when at the end of the year you pay your taxes it will likely even out and potentially increase your refund. Hope this helps.
Best of luck.
Yes, they can do this. Many employers are switching to "use it or lose it" policies and those where unpaid leave is cashed out every year, in part to prevent this very scenario. This is one reason why you should take the time off that you earned on a yearly basis and know exactly what your handbook says about this. It sounds like for you the better scenario for you would have been to take a substantial portion of time off to use the banked time so the tax consequence would not have been so harsh, or least have been given that option.
