The rule in Arizona
The rule comes from Ariz. Rev. Stat. § 23-350.
- Arizona’s wage law lists vacation pay among wages when the employer has a policy or a practice of paying it.
Use-it-or-lose-it. We found no Arizona statute or agency rule on use-it-or-lose-it policies, so the employer’s written policy usually decides.
What to check in your policy
Your handbook or offer letter decides. If it promises payout, that promise can usually be enforced. If it says unused time is forfeited, or says nothing, you may not be owed it. Keep a copy of the policy that was in force when you earned the time.
Tax on a Arizona payout
A payout is taxable wages. Take 80 unused hours at $25.00 an hour, worth $2,000.00. Paid on top of regular wages, it is a supplemental payment, so many employers withhold $440.00 of federal income tax at the flat 22% rate, plus $124.00 of Social Security and $29.00 of Medicare, leaving about $1,407.00.
Arizona income tax is withheld on top of that, under the state’s own rules, so you will receive somewhat less. Withholding is not the final tax; any difference is settled on your return.
Questions people ask
Does Arizona require employers to pay out unused PTO?
Not by law. Arizona counts vacation pay as wages only when the employer has a policy or practice of making such payments, so payout at separation depends on that policy or practice.
Is use-it-or-lose-it vacation legal in Arizona?
Usually, if the written policy says so. We found no Arizona statute or agency rule on use-it-or-lose-it policies, so the employer’s written policy usually decides.
How is a PTO payout taxed in Arizona?
Federally, a payout on top of regular wages is a supplemental payment: many employers withhold 22% for income tax, plus Social Security and Medicare. Arizona income tax is withheld as well, under the state’s own rules.