The rule in Iowa
The rule comes from Iowa Code § 91A.4.
Use-it-or-lose-it. We found no Iowa 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 Iowa 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.
Iowa 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 Iowa require employers to pay out unused PTO?
Not by law. In Iowa, vacation pay is owed when employment ends only if it is due under an agreement with the employer or the employer's policy. Under a pro-rata accrual policy, the amount is prorated for the part of the year you worked.
Is use-it-or-lose-it vacation legal in Iowa?
Usually, if the written policy says so. We found no Iowa 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 Iowa?
Federally, a payout on top of regular wages is a supplemental payment: many employers withhold 22% for income tax, plus Social Security and Medicare. Iowa income tax is withheld as well, under the state’s own rules.