Expert: Arthur Naman - 7/21/2009

Question
I was recently laid off and was paid out for my PTO.  I live in California and I am wondering about the tax rate they should be taxing my PTO. I thought it was taxed as regular income, but my former employer taxed it as if it was a bonus.  Which way is correct?

Answer
It's the same. Either way it is included as wages. The only difference may be the amount of income taxes withheld.

If as a result of being shown as a bonus, and income taxes are withheld at a flat rate of 20% (which is a normal federal rate) then you may have insufficient taxes withheld. As a result you may owe the additional taxes at the time of filing your tax return.

Please discuss this with a tax professional in your state to determine whether or not you may have to pay a significant amount of taxes or underpayment penalties.