Federal income tax is usually withheld from an annual leave payout at a flat 22%, with Social Security (6.2%) and Medicare (1.45%) taken on top, plus any state income tax that applies where you work. Combined, those deductions commonly pull about a third of the gross payout before it lands in your account. That figure is a withholding estimate, not your final tax rate, so some of it may come back as a refund when you file.
Why the Payout Is Withheld Differently Than Your Paycheck
The IRS classifies payments for unused vacation or sick time as supplemental wages, the same category that covers bonuses, commissions, and severance.1Internal Revenue Service. Publication 15 (Circular E), Employers Tax Guide Supplemental wages count as regular income on your Form W-2,2Internal Revenue Service. Publication 4128 – Tax Impact of Job Loss but employers use a different set of withholding rules to calculate what to hold back at the moment they cut the check. That is why the amount deducted from a payout often looks nothing like the withholding on a normal paycheck.
The 22% Flat Federal Rate
When a leave payout is paid as its own separate check, payroll systems generally use the flat supplemental rate. The employer multiplies the gross payout by 22% and sends that to the IRS as federal income tax withholding. The rate ignores your W-4, your filing status, and your bracket. It is an administrative shortcut, nothing more.
The flat rate applies to supplemental wages up to $1 million in a calendar year. Any portion above $1 million is withheld at 37%.1Internal Revenue Service. Publication 15 (Circular E), Employers Tax Guide Congress made those rates permanent in 2025 through P.L. 119-21, so there is no scheduled sunset.3Congress.gov. H.R.1 – 119th Congress (2025-2026)
The Aggregate Method Can Withhold More
If the payout is folded into a regular paycheck rather than issued separately, IRS rules require the employer to withhold as if the combined amount were a single ordinary payment for that pay period.1Internal Revenue Service. Publication 15 (Circular E), Employers Tax Guide The payroll software runs the inflated check through the standard graduated tax tables, treating that one paycheck as though you earn that much every period.
The result is almost always more federal withholding than the flat method would produce. A $5,000 payout added to a $2,500 biweekly paycheck gets taxed as if you earned $7,500 every two weeks, or roughly $195,000 annualized. That temporary assumption pushes the calculation into a higher bracket for that single check, even though your real annual income is nowhere near it.
Social Security and Medicare Withholding
FICA rates are fixed and give the employer no choice of method: 6.2% for Social Security and 1.45% for Medicare come out of the payout automatically.4Internal Revenue Service. Topic no. 751, Social Security and Medicare Withholding Rates
Social Security has an annual wage cap. For 2026, the 6.2% stops applying once your total wages for the year reach $184,500.5Social Security Administration. Contribution and Benefit Base If your payout arrives late in the year and you have already earned close to that limit, part or all of it may escape Social Security tax. Medicare has no ceiling, so the 1.45% applies to every dollar.
High earners face an Additional Medicare Tax of 0.9% once wages cross a threshold set by filing status:6Internal Revenue Service. Topic no. 560, Additional Medicare Tax
- $250,000 for married filing jointly
- $200,000 for single filers and most other statuses
- $125,000 for married filing separately
Employers begin withholding the additional 0.9% once your wages with that employer pass $200,000 for the year, regardless of your filing status. Any mismatch between what was withheld and what you actually owe gets reconciled on your return.
State (and Sometimes Local) Withholding
Most states with an income tax treat leave payouts as supplemental wages. Some publish a flat supplemental rate for employers to use, while others require the same graduated tables that apply to a normal paycheck. Flat supplemental rates in the states that use them generally fall in the range of about 5% to 12%, depending on where you work.
A handful of states impose no wage income tax at all, so employees there see no state deduction on the payout. If you live in one state and work in another, your employer may need to withhold for both, though reciprocal agreements between some neighboring states prevent double withholding. Certain cities and counties also levy their own income or payroll taxes that will come out of the check.
Withholding Is Not the Same as What You Owe
The 22% flat rate, or the larger amount produced by the aggregate method, is a prepayment to the IRS. Your actual federal income tax depends on your total annual income, filing status, deductions, and credits. If your marginal bracket for the year is 10% or 12%, the 22% withholding was more than needed and the excess returns as part of your refund. If your bracket is 24% or higher, the flat rate underwithheld and you will owe a bit at filing time.
The IRS Tax Withholding Estimator lets you run the numbers mid-year to see where you stand. If a large payout is coming and you know about it in advance, submitting a new W-4 to reduce withholding on your remaining regular paychecks can offset the over-withholding on the supplemental payment and even out your take-home pay.
Routing Part of the Payout Into a 401(k)
If your employer’s 401(k) plan treats leave payouts as eligible compensation, you can defer part of the payout into the plan before federal income tax is withheld on that portion. Federal regulations allow a lump-sum payment for unused vacation to count as compensation for retirement plan purposes when it is paid within 2½ months of separation or by the end of the plan year, whichever is later.7eCFR. 26 CFR 1.415(c)-2 – Compensation
For 2026, the standard employee 401(k) contribution limit is $24,500. Workers 50 and older can add $8,000 in catch-up contributions, and those aged 60 through 63 have a higher catch-up limit of $11,250.8Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500 If you have room left under your annual limit, routing part of the payout into the plan is one of the few ways to shrink the tax bite before the check is issued. Not every plan document defines leave payouts as eligible compensation, so confirm with HR or the plan administrator before your last day. FICA still applies to the deferred amount even when income tax withholding does not.
Which Year the Payout Is Taxed In
A leave payout is taxable in the year you receive it, not the year you earned the leave or the year you stopped working. A final day in December with a payout check dated in January puts the income into the following tax year. That timing can matter if you are retiring, moving to lower-paying work, or expecting your income to shift meaningfully between the two years. If you have any control over the pay date, it is worth weighing which year the extra income lands better in.