Again, the IRS provides information on how to handle a lump-sum vacation payout. IRS Publication 15 states that an annual lump-sum payout for unused vacation time is a supplemental wage for employees (which we’ll get to in a minute). Employers do not use different tax rates if an em...
The employer is expected to compensate the unused paid leaves, called leave encashment. If the employee continues to work in the organization after receiving the encashment, it is treated as a salary and not exempted from taxes. The organization will deduct the tax at the source. On the other...