Federal Employee Annual Leave Lump-Sum Payout: How It's Calculated, Taxed, and Maximized

Most federal employees know they'll receive a cash payout for unused annual leave when they retire. Fewer know exactly how large it can be, how it's taxed, or that the timing of their retirement date can legally add thousands of dollars to the amount they receive. This guide covers all of it.

What the lump-sum payment is

When you separate from federal service — through retirement, resignation, or other departure — you receive a lump-sum payment for all unused annual leave on your books. The payment is separate from your FERS pension; it comes from your agency, not OPM, and typically arrives 4–8 weeks after your retirement date.

For a GS-14 employee with a $130,000 salary and 300 hours of accumulated leave, the gross payout is roughly $18,700. For a senior employee with $150,000+ in salary and a maximum leave balance, the payout can exceed $40,000–$50,000. Unlike sick leave — which converts to pension-service credit but is never paid in cash — annual leave is always paid out in full.

How the lump-sum is calculated

The formula is straightforward:¹

Gross payout = Unused annual leave hours × (Annual salary ÷ 2,087)

OPM uses 2,087 hours as the standard work-hours-per-year divisor to derive the hourly rate. This number is fixed by regulation and does not vary by agency or schedule.

What counts as your "annual salary" for the calculation

The rate used is your rate of basic pay at the time of separation, which includes:¹

• Your base GS or equivalent salary
• Locality pay adjustment (the component that varies by metro area)
• Any within-grade increase you're entitled to on or before your separation date
• Any across-the-board annual adjustment effective before your separation date
• Non-foreign area cost-of-living allowances and post differentials (for overseas employees)

What is not included: overtime pay, awards, cash bonuses, or any other form of premium pay.

Worked examples

Example A: GS-13 step 10 in the Washington, D.C. locality

• Annual salary (base + locality): $134,000
• Unused annual leave: 240 hours
• Hourly rate: $134,000 ÷ 2,087 = $64.21/hr
• Gross payout: 240 × $64.21 = $15,410

Example B: GS-15 step 7, same locality

• Annual salary: $172,000
• Unused annual leave: 380 hours (accumulated mid-year before carryover cap would apply)
• Hourly rate: $172,000 ÷ 2,087 = $82.41/hr
• Gross payout: 380 × $82.41 = $31,316

Example C: SES career executive

• Annual salary: $210,000
• Unused annual leave: 640 hours (SES 720-hour carryover ceiling, partially used)
• Hourly rate: $210,000 ÷ 2,087 = $100.62/hr
• Gross payout: 640 × $100.62 = $64,397

Annual leave accrual and carryover caps

Before you can maximize the payout, you need to know your accrual rate and how much you can actually carry into retirement.

Accrual rates by length of service²

Military service credit that counts toward FERS creditable service also counts toward these accrual tiers. A civil servant with 10 years of prior active-duty military credit (and a military buyback) starts accruing at 6 hours per pay period from day one as a civilian.

Maximum carryover caps²

At the end of each leave year (the last full pay period before January 1), any annual leave above the maximum carryover ceiling is forfeited — the "use-or-lose" rule. The caps are:

• General employees (CONUS): 240 hours (30 days)
• Overseas employees: 360 hours (45 days)
• SES, SL, ST positions: 720 hours (90 days)

These caps apply only to the carryover from one leave year to the next. Within a leave year, your balance can exceed the cap as you continue to accrue — which is exactly why retirement timing matters.

How the lump-sum is taxed

The annual leave payout is treated as ordinary income in the year you receive it, with the same tax treatment as regular wages. Here's what's withheld:³

Federal income tax

The IRS treats the lump-sum as supplemental wages. Your agency withholds federal income tax at the mandatory flat supplemental rate of 22% (for amounts under $1 million).³ This is a withholding rate, not your actual tax rate. Your real federal income tax on the payout depends on your total income for the year — salary earned before you retired, FERS pension, TSP withdrawals, investment income, and the lump sum itself. If your marginal rate is higher than 22%, you'll owe the difference at filing. If it's lower, you'll get a refund on that portion.

Social Security (FICA) tax

FERS employees pay Social Security tax (6.2%) on the lump-sum up to the 2026 annual wage base of $184,500.⁴ If your salary for the year already exceeded $184,500 before your retirement date, no Social Security tax is withheld from the lump-sum. If you're below the threshold, the tax applies to the portion that brings you up to the cap — and stops there.

CSRS employees do not pay Social Security on any of their federal employment income, including the lump-sum.

Medicare tax

The 1.45% Medicare tax applies to the entire lump-sum with no wage base cap. High-income employees also pay the 0.9% Additional Medicare Tax on combined wages above $200,000 (single) or $250,000 (married filing jointly) for the year.

What is NOT withheld

• FERS retirement contributions — none. The payment is not covered federal pay in the pension sense.
• FEHB health insurance premiums — none.
• FEGLI life insurance premiums — none.
• TSP contributions — you cannot direct any portion of the lump-sum into your TSP or an IRA. It is paid directly to you as cash, and you cannot elect otherwise.¹

The inability to shelter the payout in a tax-advantaged account is the key planning constraint. There is no legal mechanism to defer taxation on the annual leave lump-sum.

Annual leave lump-sum calculator

Enter your figures below for a quick estimate. The calculator uses the 2026 Social Security wage base ($184,500) and the IRS 22% supplemental withholding rate.

Strategies to maximize your lump-sum

1. Retire at the end of a pay period — not mid-period

Annual leave accrues at the end of each biweekly pay period. If you retire mid-pay-period, you do not earn leave credit for that partial period. Retiring on the final day of a pay period (or the last Friday of a pay period if you're on a standard schedule) ensures you capture that period's accrual before separating.

2. Retire before the end of the leave year to preserve above-cap balances

The 240-hour carryover cap is enforced only at the start of a new leave year. If you start 2026 with 240 hours and accrue 8 hours every pay period, by November you'll have 240 + ~168 hours = ~408 hours. If you retire in November, you receive all 408 hours. If you wait until the new leave year starts without retiring, the balance reverts to 240.

This is the most common timing error in federal retirement planning: assuming you can carry unlimited leave forward. You can't — but you can cash it out before the cap resets by retiring before the end of the leave year.

3. Weigh late-December retirement vs. early-January (pay raise timing)

Federal pay raises typically take effect in January. If a pay raise is scheduled, retiring in mid-January rather than late December means your lump-sum is calculated at the higher rate. The math: a $5,000 raise on a $150,000 salary adds about $2.39 to your hourly rate. On 240 hours, that's $574 more in gross payout. Whether that outweighs other considerations (tax bracket management, pension start date, IRMAA) is a calculation your specific situation requires.

4. Don't "burn" annual leave you'd prefer as cash — unless you're near the use-or-lose deadline

A common impulse before retirement is to use accumulated leave for a long vacation. Whether that's better than the cash payout depends on your marginal tax rate. If your combined retirement-year income puts you in the 32–37% bracket, "spending" leave on vacation rather than cashing it out saves you that tax cost. If you're in the 22% bracket and the 22% withholding roughly matches your actual rate, the payout and the vacation are equivalent in after-tax terms — but the payout is taxable income that could affect IRMAA.

5. Monitor use-or-lose deadlines carefully

If you carry 240 hours into a year and accrue aggressively toward the end, leave earned from mid-year on may be "scheduled annual leave" subject to use-or-lose rules if your agency has specific restoration policies. Check with your HR office on exactly how many hours are "protected" vs. at risk of forfeiture if retirement plans change.

The IRMAA problem in your retirement year

Medicare's income-related monthly adjustment amount (IRMAA) is assessed on your modified adjusted gross income from 2 years prior. This means income in your retirement year sets your Medicare premiums in year 2 of retirement.⁵

The 2026 IRMAA first-tier thresholds are $109,000 (single) and $218,000 (MFJ). Crossing into the first tier adds $70.90/month to your Medicare Part B premium — roughly $850/year. Higher tiers add progressively more.

In a typical retirement year for a senior federal employee, income stacks like this:

• 6–9 months of full salary (pre-retirement pay period)
• 3–6 months of FERS annuity (OPM typically pays interim for the first 2–3 months, then final)
• Annual leave lump-sum ($15,000–$50,000)
• Any Roth TSP conversions you planned for that year

These four income streams in a single year routinely push federal retirees above the IRMAA thresholds they'll otherwise stay below in subsequent years. A fee-only planner who works with federal employees models this entire year before you retire — not after — to identify whether a timing adjustment (retire a few months earlier or later, defer a Roth conversion, use leave instead of cashing it out) meaningfully changes your Medicare costs in years 2–3 of retirement.

The retirement-year tax bracket problem

Because the lump-sum is withheld at only 22%, high-earning federal employees sometimes underestimate the April tax bill in their first retirement year. Consider a GS-15 who earns $170,000 through July before retiring with a $28,000 lump-sum. Their total retirement-year income might be:

• Salary (7 months): ~$99,000
• FERS annuity (5 months interim + partial final): ~$25,000
• Annual leave lump-sum: $28,000
• Total: ~$152,000

At $152,000 (single filer), much of that income is in the 24% bracket. The 22% withholding on the lump-sum leaves a gap. Adjusting your W-4P withholding on the FERS annuity during the partial-year period can reduce the April surprise — or making an estimated tax payment by January 15 of the year following retirement.

What a fee-only advisor actually models here

The annual leave payout sounds mechanical — multiply two numbers, subtract taxes. The complexity lies in how it interacts with everything else happening in your retirement year:

• Whether your combined income triggers IRMAA two years post-retirement
• Whether the retirement year is the right year for a Roth conversion — or whether the salary + lump-sum already pushes you to the bracket ceiling
• The optimal retirement date given pay period schedule, pay raise timing, leave balance, and IRMAA exposure
• Whether using leave (taking an extended pre-retirement vacation) vs. cashing it out is better after-tax at your specific bracket and situation
• Withholding adjustments to avoid underpayment penalties in the retirement year

None of these questions is complicated in isolation. Answered together for a specific person's income, timeline, and goals, they typically generate several thousand dollars of difference in net outcome.

1. Lump-sum calculation formula, included pay components, and TSP contribution restriction: OPM — Lump-Sum Payments for Annual Leave. Hourly rate derived by dividing annual salary by 2,087 hours per OPM — How to Compute Rates of Pay.
2. Annual leave accrual rates and carryover ceilings (240/360/720 hours): OPM — Annual Leave for Federal Employees; 5 CFR § 630.301 (SES accrual); 5 CFR § 630.302 (general accrual tiers).
3. 22% supplemental wage withholding rate and ordinary income treatment: IRS Publication 15 (Circular E), 2026; IRS Topic No. 751 — Social Security and Medicare Withholding Rates.
4. 2026 Social Security wage base $184,500; 6.2% employee rate; 1.45% Medicare: SSA — Contribution and Benefit Base; SSA — 2026 Update.
5. 2026 IRMAA thresholds ($109,000 single / $218,000 MFJ first tier): Medicare.gov — Medicare Costs; CMS 2026 Part B premium announcement.

Values verified as of May 2026. Social Security wage base and IRMAA thresholds adjust annually; confirm for your retirement year. Federal withholding rates are subject to IRS annual updates.