The rule in Tennessee
The rule comes from Tenn. Code Ann. § 50-2-103.
Use-it-or-lose-it. We found no Tennessee 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 Tennessee 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.
Tennessee does not tax wage income, so that is close to what you receive. Withholding is not the final tax; any difference is settled on your return.
Questions people ask
Does Tennessee require employers to pay out unused PTO?
Not by law. Tennessee does not require payout of unused vacation unless the employer's policy or labor agreement specifically provides for it.
Is use-it-or-lose-it vacation legal in Tennessee?
Usually, if the written policy says so. We found no Tennessee 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 Tennessee?
Federally, a payout on top of regular wages is a supplemental payment: many employers withhold 22% for income tax, plus Social Security and Medicare. Tennessee does not tax wage income, so no state income tax is withheld.