If you offer employees the chance to cash out their accumulated paid time off (PTO), you might be putting them at risk for a surprise tax bill. That's because PTO cash-outs must be handled a certain way.
We protect your employees and company from PTO tax liabilities.
Without the expert advice from Employee Benefits Law Group, both you and your employees could be on the hook for unexpected taxes even if your employees don't exercise the cash-out option. That's because of an income tax doctrine known as "constructive receipt," which taxes income that the taxpayer could have received even though the taxpayer does not elect to receive it.
The good news is that you can still provide PTO cash-out options without this harsh result. The cash-outs simply must be administered under a policy that complies with the constructive receipt rules as interpreted by the IRS. We regularly advise employers and their other advisors on all aspects of PTO cash-outs, including how to design PTO cash-outs to avoid the constructive receipt problem and how to correct tax reporting failures for open tax years.
Several of our public sector clients have suggested that their PTO cash-out programs only have problems if the IRS examines their programs. That’s like saying, "I'm speeding only if I get caught."