The rule in Colorado
The rule comes from C.R.S. §§ 8-4-101(14)(a)(III), 8-4-109(1)(a); Nieto v. Clark's Market, Inc., 2021 CO 48, 488 P.3d 1140.
- Leave you can use only for specific events, such as sick leave or bereavement, is not vacation pay and does not have to be paid out.
- Truly unlimited PTO is ordinarily not payable, because no set amount is earned.
Use-it-or-lose-it. Colorado treats earned vacation as wages, so a policy that takes it away is not allowed. A cap that stops further accrual is a different thing and is allowed.
What to check in your policy
Because Colorado law requires the payout, a handbook clause that says unused vacation is lost when you leave generally does not override it; any exception is in the rule above. Check that your final paycheck includes every earned hour.
Tax on a Colorado 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.
Colorado 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 Colorado require employers to pay out unused PTO?
Yes. In Colorado, earned vacation pay, including PTO you can use for any purpose, must be paid when you leave for any reason, and any policy that forfeits earned vacation is void. Employers may cap how much vacation you accrue, but not how much earned vacation carries over to the next year.
Is use-it-or-lose-it vacation legal in Colorado?
No. Colorado treats earned vacation as wages, so a policy that takes it away is not allowed. A cap that stops further accrual is a different thing and is allowed.
How is a PTO payout taxed in Colorado?
Federally, a payout on top of regular wages is a supplemental payment: many employers withhold 22% for income tax, plus Social Security and Medicare. Colorado income tax is withheld as well, under the state’s own rules.