Updated: Nov 17
The Pros and Cons of Cash Out Policies
If you're like many of us, you work too hard and don't take nearly enough time off.
Maybe your company allows some of your vacation time to be carried over into the next year.
Or possibly your employer operates under a use-it-or-lose-it PTO policy.
If you're one of the lucky ones, you may have the option of cashing out your PTO.
But which one is best?
If you're wondering, “Is it better to take PTO or cash out?” you've come to the right place.
Here, we’ll cover all things PTO and give you the information you need to make the best decision about how to spend yours.
Table of Contents
Can I Cash Out My PTO?
A PTO cash-out policy is when employees are given the choice of taking a cash payout in place of their PTO. Most companies may offer a cash-out policy for when an employee is terminated.
If you’re wondering, “Can I cash out my PTO?” The answer is maybe, but maybe not. It all depends on your employer's current type of policy for paid time off.
Understanding Your Company’s PTO Cash Out Policy
If you are an employee who is operating under a …
Use-it-or-lose-it PTO policy, which requires you to use your PTO by a certain date or lose it; or
Rollover with a cap PTO system, which allows you to carry some of your unused PTO forward into the next year (up to a certain “capped” amount)
… you will not have the option of cashing out the paid time off you have earned.
On the other hand, if you work for a company that has realized the upside of empowering their employees to take meaningful time off, you just may have the option of taking advantage of a PTO cash-out program.
3 Examples of When Cashing Out Can Be Beneficial
Let's start by taking a look at a few examples of when cashing out paid time off might just be the preferred way to go.
#1: The Cash You’d Earn From Cashing Out Would Be More Beneficial Than Taking Time Off
Your transmission went out.
You’ve held off on getting that new roof for longer than you should have.
Your unexpected surgery has left you with a sky-high pile of unpaid medical bills.
The truth is, there are times when the money you would earn from cashing out your paid time off might prove to be more beneficial to you than actually taking that time away from the office.
Having the option of cashing out your PTO to get the immediate funds for pressing needs can be a huge help that can also provide welcome peace of mind.
#2: You Have More PTO Than You Know How to Use
Maybe you have 20 days, or 40, or even more in paid time off that you have accrued over the years and the feasibility of using it all just doesn’t seem possible.
If you are one of those individuals who has enough PTO to last a lifetime, then cashing it out into an accessible lump sum might be a great option for you.
#3: You Want to Use Some, But Not All, of Your Acquired PTO
You love vacations. You want a vacation. Not only that, but you need a vacation.
The money just isn’t there — but you've got 10 days of PTO.
What if there were a way to take your vacation and pay for it, too? There is.
With Sorbet, you can easily do a split, using some of your acquired paid time off days while cashing in on the others. So, you can easily take 5 days off to take that vacation and cash out the other 5 days to pay for it.
When Is it Better to Take PTO vs. Cash Out?
Is it ever a better option to take PTO days instead of cashing them out? Let's take a look at a few scenarios where that might be the best choice.
Your Employer Has a “Use It or Lose It” Policy
If your employer operates under a use-it-or-lose-it employee paid time off policy, you will not be paid for any unused vacation leave at the end of a specific deadline (usually the end of the year). Once you reach the preset deadline, all of your remaining days of PTO will be forfeited — and unpaid.
Not taking time off under the use-it-or-lose-it framework is basically the same as leaving your hard-earned money in your employer’s pocket.
Look at it this way: If you aren't using each and every one of your paid vacation days, you are essentially doing your job for free.
Your Employer Only Lets You Carry So Many Days Into the New Year With No Cash-Out Option
A carryover cap limits the number of days of paid time off that you can carry over from one year to the next. You can carry over some of your days, but not all of your days.
For example, maybe you are allowed to carry PTO days into the coming year, but your cap is set at 10 days. The problem is that you’ve got 30 days of PTO waiting on you. In this case, you would be able to carry over 10 of your days, meaning you would be out the remaining 20 days of hard-earned time off.
Similarly, if your carryover cap is zero, it means that your entire balance of paid time off will be forfeited at the end of that PTO cycle.
It doesn't require too much thought to determine that taking paid time off for any days that won’t carry over into the coming year is the smart way to go.
Your Work-Life, Home-Life Balance Is Off
Any time you are spending too much of your time working, your work-life, home-life balance is going to suffer.
And as much as you want to get things done on the job, prioritizing the demands of work over the demands of your personal life is a sure recipe for disaster.
When you feel yourself struggling with your mental or physical health, one of the best things you can do is to utilize your days of paid time off to take the time to step away from the job to relax and refresh, effectively navigating PTO and inflation for a healthier work-life balance.
Is it Bad to Cash Out PTO? Potential Drawbacks to Cashing Out PTO for Employers & Employees
Some say yes, others, no.
The bottom line: Studies show that employees who are taking vacation days, even if they don't go on vacation, are more productive in the office.
However, there are situations where cashing out PTO can be beneficial and stress-reducing, like paying debts or covering needed repairs.
Employee: Your PTO Cash Out Will Be Taxed
If you decide to cash out your paid time off, you will be getting a lump sum payment from your employer.
According to the current Internal Revenue Service (IRS) rules, any and all lump-sum payments are considered to be supplemental wages and will be subject to Social Security and Medicare taxes, even if your maximum contribution limit exceeds the amount of your vacation payout.
In addition, you will be charged the IRS supplemental wage tax rate of 25% for any federal income tax withheld.
Employer: Employees May Not Take the Time They Need to Recharge and Refresh
As an employee, you want to work hard at your job, but you also understand the importance of staying physically healthy and emotionally sound.
While the employee who never takes a day off may be able to brag about their dedication, in the long run, they are much more susceptible to experiencing burnout than an employee who at least takes a mental health day every now and again.
Cashing out PTO may have a negative impact on your well-being by contributing to employee burnout.
Adding cash-out options to your PTO policy? Get the inside scoop on added tax implications and how to avoid potential risk.
How to Cash Out PTO Easily and Efficiently With Sorbet
At Sorbet, we want to normalize taking time off.
Using your PTO is not weird. It’s nothing to feel guilty about, and it definitely doesn’t mean you’re a slacker.
The fact is, unused PTO is a lose-lose for employers and employees.
When your employer gives you the option to cash out your unused PTO, it can turn a tired, burnt-out employee into a productive and healthy individual.
Sorbet is the sweet solution to the PTO problem.
Sorbet turns clunky PTO systems into a win-win for employers and their employees by:
Saving employers' money by lowering annual accrued liabilities
Allow employees to instantly cash out their unused PTO, so it doesn't go to waste
Giving ideas for pre-approved dates for employees to utilize their PTO
To find out more about taking your current PTO system to the next level, click here to schedule a free Sorbet demo today.