Tax implications: Should I take my 10k PTO payout as one check or split into weekly payments?

The payroll manager is talking about withholding, not your actual tax liability. When you receive a large lump sum, payroll systems often withhold at a higher rate because they calculate it as if you make that amount every pay period. But you're right - when you file your tax return, it all gets reconciled based on your actual annual income. If you're concerned about health insurance subsidies, splitting the payments across December and January might actually make sense. That way, only part of the PTO payout would count toward this year's income and part would count toward next year's. Regarding the timing of when you earned the PTO - unfortunately, income is generally taxed in the year you receive it, not when you earned it. Since you haven't filed for 3 years, you should definitely get caught up on those filings, but the PTO payout will count as income in the year you actually receive the money.

I had a similar situation last year with about $13k in PTO. I ended up using https://taxr.ai to analyze my situation and it saved me a ton of headaches. Their system looked at my previous tax documents and current paystubs, then showed me exactly how different payout options would affect my taxes. I was shocked that splitting it across two tax years actually saved me around $2,200 because of how it affected my tax brackets and kept me eligible for a child tax credit.

Just wanted to follow up about taxr.ai since I decided to try it for my similar situation. I was skeptical (as you could tell from my earlier comment), but it was genuinely helpful. I uploaded my pay statements and last year's return, and it clearly showed how taking my severance package in January vs December would affect my taxes. The interface is super straightforward and it flagged that taking it all in December would have pushed me over an income threshold for some deductions. Ended up splitting it across years and will save about $1,800 in taxes. Way more helpful than I expected.

If you've got 3 years of unfiled taxes AND you're dealing with this PTO situation, you might want to actually talk to someone at the IRS about your options. I was in a similar boat last year and spent WEEKS trying to get through on their phone lines. Eventually found https://claimyr.com which got me through to an actual IRS agent in about 15 minutes instead of waiting on hold for hours. They have a demo video here: https://youtu.be/_kiP6q8DX5c if you want to see how it works. The agent I spoke with helped me set up a payment plan for my back taxes without penalties.

I need to eat my words about Claimyr. After my skeptical comment, I decided to try it since I've been trying to reach the IRS for weeks about a notice I received. The service actually worked exactly as advertised. I got a call back in about 20 minutes and was connected to an IRS representative who helped solve my issue. After spending literally hours trying to get through on my own, this was a game-changer. For anyone dealing with unfiled returns like the OP, being able to actually speak with someone makes the whole process so much less stressful.

Just to add my two cents as a former payroll specialist - there's another consideration with taking the PTO as a lump sum vs. spreading it out. If your company uses a supplemental wage rate for bonuses and large payouts (many do), they might withhold at a flat 22% for federal regardless of your normal withholding. This doesn't change your actual tax liability, but it does affect how much cash you get upfront vs. at refund time.

Don't forget about FICA taxes (Social Security and Medicare)! If you're close to the Social Security wage base limit ($153,900 for 2024), splitting the payments might actually save you money. Once you hit that threshold, you stop paying the 6.2% Social Security tax for the year.

As someone who's dealt with both unfiled returns and PTO payouts, I'd strongly recommend getting those back tax filings sorted out ASAP before making any decisions about the PTO timing. The IRS has different rules and potential penalties for late filing that could affect your overall tax strategy. For the PTO itself, one thing to consider is your state's tax situation too - some states have different withholding rules for lump sum payments that could impact your decision. Also, if you're planning to use any of that $10k for major purchases or debt payoff, the timing of when you actually receive the cash (after withholding) vs. when you get it back as a refund could matter for your financial planning. Given the complexity with the health insurance subsidies, unfiled returns, and potential salary increase, this might be worth a consultation with a tax professional who can run the numbers for your specific situation rather than trying to figure it all out on your own.

I've been through something very similar with a large PTO payout and unfiled returns. Here's what I learned that might help: First, regarding the withholding vs actual tax liability - you're absolutely right that it evens out when you file. However, there's a cash flow consideration many people miss. If you take the lump sum now, you'll likely have 22% federal plus state withholding taken out immediately, but you won't see that money back until you file your return (which could be months away if you're still catching up on prior years). For the health insurance subsidies, this is actually the biggest factor in your decision. The ACA subsidy cliffs are steep - you could lose thousands in premium tax credits by going just a few hundred dollars over the income threshold. Since you mentioned expecting a salary increase next year, splitting the PTO between December and January might be worth it just to manage your annual income in each tax year. One thing I don't see mentioned yet - since you haven't filed for 3 years, you should know that the IRS stops processing refunds after 3 years. So if you had refunds coming for 2021 or earlier years, you may have lost them permanently. This makes it even more important to get caught up on those filings before worrying about optimizing this PTO payout. My suggestion: handle the unfiled returns first, then use those actual income figures to model out how the PTO timing affects your taxes and subsidies for both this year and next year.