PTO hours taxed at a higher rate?

[dh003i]

Any answer to this question, from an administrator at the Univ. Rochester MC:

I just found out through an employee (who's on bi-weekly pay) that the PTO dollars are taxed at a higher rate than normal weekday hours. He's decided that because of this, he's going to have his PTO deferred to his tax shelter at the end of the year. He had heard about this and I told him he should confirm this with HR, which he did. What do you think?

Are they taxed higher when they're paid out at the end of the year, or as the hours are used during the year?

I was asked about this, and would venture that when they're used during the regular year, they are used in place of normal hours pay, for time-frames when you go to the doctor, etc; thus, during the regular year, they are not taxed extra. However, if you don't use any PTO, and take it at the end of the year (unless you put it in the 403b), it would be extra hours, and probably taxed like a higher rate.

Is this correct? If anyone has the details on this (I did a Google search, but it was non-informative), please provide some refs.

[E as in ERISA]

The WITHHOLDING rate might be higher. Look on the IRS web page for Publication 15, Circular E. A higher flat withholding rate may be applied to a supplemental payment that is made separately from regular payrolls. But then he may get a higher refund if that rate is higher than his marginal rate.

[dh003i]

I did a web-search for Pub 15, Circ E, and found this document. However, it mentions nothing about the witholding rate and taxation rate of PTO hours (the document does not have the words "time off" or PTO in it).

[Harwood]

In Publication 15, look at "Supplemental Wages"

Supplemental wages are compensation paid in addition to employee’s regular wages. They include, but are not limited to, bonuses, commissions, overtime pay, payments for accumulated sick leave, severance pay, awards, prizes, back pay and retroactive pay increases for current employees, and payments for nondeductible moving expenses.

How you withhold on supplemental payments depends on whether the supplemental payment is identified as a separate payment from regular wages.

Etc.

[oriecat]

There is also a separate section under the Supplemental Wages section that is specifically about vacation pay, which PTO is considered a form of.

Vacation Pay

Vacation pay is subject to withholding as if it were a regular wage payment. When vacation pay is in addition to regular wages for the vacation period, treat it as a supplemental wage payment. If the vacation pay is for a time longer than your usual payroll period, spread it over the pay periods for which you pay it.

[E as in ERISA]

So doesn't that source confirm your conclusion?

When the person actually takes a vacation and gets paid the normal amount for that time period, then you generally don't treat it as a supplemental payment -- you just withhold on it as regular wages. When the person doesn't take vacation and takes the money in cash -- or if he gets paid more than he normally would for the period -- then it would get taxed under the supplemental rules.

[Harwood]

Let's not forget Katherine's first post - withholding can be higher but the money is ultimately taxed at the same rate, regardless of the withholding.

[E as in ERISA]

Yes. I should have said that "withholding is applied under the supplemental rules."