The rule in Michigan
The rule comes from Mich. Comp. Laws § 408.473.
Use-it-or-lose-it. In Michigan, a written policy can make unused vacation lapse; the policy’s terms decide.
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 Michigan 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.
Michigan 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 Michigan require employers to pay out unused PTO?
Not by law. Michigan requires employers to pay vacation and other fringe benefits according to the terms of their written contract or written policy. If the policy does not provide for payout, the employer does not have to pay unused time.
Is use-it-or-lose-it vacation legal in Michigan?
Yes. In Michigan, a written policy can make unused vacation lapse; the policy’s terms decide.
How is a PTO payout taxed in Michigan?
Federally, a payout on top of regular wages is a supplemental payment: many employers withhold 22% for income tax, plus Social Security and Medicare. Michigan income tax is withheld as well, under the state’s own rules.