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Vacation Cash-Out Policy Can Expose Employers to Significant Tax Problems

Date:
06/24/2008

Source:
Walter W. Miller

Link:

Description:
Many employers maintain a policy, or possibly a collective bargaining agreement, allowing employees to cash-out all or a portion of their accrued vacation or other leave upon request. In other words, the employee can elect to either receive cash, or use the leave for paid time off at some future date. A leave cash-out arrangement as described above falls within the no good deed goes unpunished adage. It brings into play a tax principle known as the "constructive receipt" rule. Under this rule, the value of the leave that an employee can elect to "sell" for cash is taxable, even if the employee chooses not to receive the cash-out. Because an employer is liable for the withholding and payment of applicable employment taxes, the failure of an employer to properly treat amounts that are not cashed-out but are nevertheless constructively received as taxable wages can result in the assessment of substantial taxes and penalties. Click on the pdf link for more information.

Download:
Vacation Cash-Out Policy1.pdf