Indiana PTO payout law

In Indiana, earned vacation is generally paid when a job ends unless a written policy says otherwise. Here is the rule, its source, and what your balance is worth.

Indiana vacation payout rule

Required unless a written policy says otherwise

Indiana courts treat promised vacation pay as deferred wages, so you are owed a pro-rata share of earned vacation when you leave unless an agreement or policy provides otherwise.

Checked against the full official text · September 25, 2026

Payout when a job ends: Required unless a written policy says otherwise
Use-it-or-lose-it: No state rule found
State income tax on a payout: Withheld under state rules
Source: Die & Mold, Inc. v. Western, 448 N.E.2d 44 (Ind. Ct. App. 1983) (opens in a new tab)

What your unused PTO is worth

Your PTO payout

Indiana · Required unless a written policy says otherwise

$2,000.00 before tax, for 80 hours

Your PTO payout, line by line
Unused PTO 80 h × $25.00	$2,000.00
Federal income tax Flat 22% supplemental rate	−$440.00
Social Security 6.2%	−$124.00
Medicare 1.45%	−$29.00

Estimated after federal withholding

$1,407.00

Hourly value: $25.00
Share withheld: 29.65%

Required unless a written policy says otherwise

Indiana courts treat promised vacation pay as deferred wages, so you are owed a pro-rata share of earned vacation when you leave unless an agreement or policy provides otherwise.

State and local income tax are not included. Your employer may withhold federal tax by the aggregate method instead of the flat rate; either way, the final tax is settled on your return.

The rule in Indiana

The rule comes from Die & Mold, Inc. v. Western, 448 N.E.2d 44 (Ind. Ct. App. 1983).

No Indiana statute addresses vacation payout. The rule comes from the Court of Appeals decision in Die & Mold, Inc. v. Western (1983).

Use-it-or-lose-it. We found no Indiana 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

Look for a written clause on unused vacation at separation. If there is none, the time is generally owed. If there is one, it usually decides, so read what it says about quitting, being let go and notice periods.

Tax on a Indiana 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.

Indiana 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 Indiana require employers to pay out unused PTO?

Usually. Indiana courts treat promised vacation pay as deferred wages, so you are owed a pro-rata share of earned vacation when you leave unless an agreement or policy provides otherwise.

Is use-it-or-lose-it vacation legal in Indiana?

Usually, if the written policy says so. We found no Indiana 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 Indiana?

Federally, a payout on top of regular wages is a supplemental payment: many employers withhold 22% for income tax, plus Social Security and Medicare. Indiana income tax is withheld as well, under the state’s own rules.

Sources

Each source was read on September 25, 2026.