Vacation and Other Time-Off Pay

April 13, 2006

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If you've extended your employees the benefit of paid vacation time, these payments are considered taxable wages, notwithstanding that the payments are for periods when the employees are absent from work. The same rule applies if you give extra pay to employees who do not take their vacations, to compensate them for the extra time that they could have taken off.

This rule also applies to most other payments you make while employees are not at work, including holiday pay, sick pay, maternity or paternity leave, disability pay, military leave pay, etc.

Jury duty. In general, any pay you give your employees while they are serving on jury duty is considered taxable wages for payroll tax purposes. However, the taxable amount can differ depending on how you treat your employees' jury duty pay:

If you reduce your employees' regular wages by their jury duty pay, your payroll tax obligations apply to the reduced wage amount.
If you pay your employees their regular wage, but require them to assign their jury pay to you, your payroll tax obligations apply to the regular wage amount as reduced by the assigned jury duty pay.
If you pay your employees their regular wage and allow them to keep their jury duty pay, your payroll tax obligations apply to only the regular wage amount.