Paid Time Off, including Sick, Vacation, and the like policies, are an essential employee benefit, allowing workers to take time off while still receiving compensation. Many employers also offer PTO cash-out options where employees can receive payment for unused leave. However, these policies must be carefully structured to avoid unintended tax consequences under the IRS constructive receipt doctrine. If improperly designed, a PTO cash-out policy could result in employees being taxed on income they never actually received. This article explains how constructive receipt applies to PTO payouts and outlines strategies employers can use to structure PTO policies in a tax-compliant…
