Federal law does not require employee vacations, paid or unpaid. Thus, it is determined by employer policy. But, if your company does offer vacation, it should be part of your employee handbook so that both employee and employer know the rules for vacation.

• Apply all withholding taxes to vacation pay.
• If vacation pay is advanced and included in the normal paycheck for the period, apply withholding for the entire check over a longer period. For example; if you pay biweekly and include 1 week's paid vacation, withhold for a 3-week period.

Employers have two choices when including accrued vacation in a final paycheck as supplemental wages;

1. If the supplemental and regular wages are combined and the amount of each is not specified, withhold income tax as if the total were a single payment for a regular payroll period.

2. If supplemental wages are paid separately or included with regular wages but specified as separate, withholding depends partly on whether FIT is withheld from regular wages. If FIT was withheld from regular wages, the employer can use one of the following withholding methods;

1. withhold as supplemental pay at 25%; OR
2. withhold as if supplemental pay plus regular wages for the most recent payroll period were a single payment, as follows; Total withholding taxes on combined payment-taxes already withheld on regular pay = remaining tax to be withheld. Next tip: Overtime Pay: the rules