Payment for unused annual leave


Q. I’m going to retire and will receive a lump-sum payment for my unused annual leave. How is that payment calculated? Is it accumulated hours x current hourly wage? Is this considered unearned income? How is it taxed?

A. Your lump sum annual leave payment would be based on the hourly rate of basic pay you would have received if you had remained on the job. If you retire before an annual pay adjustment becomes effective, any hours before that change will be computed at the old rate and those after the change at the new rate. Any step increase that would have occurred after you retired won’t be included because you have to be at work to receive that. As for income tax, lump sum payments are treated as earned income.


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Reg Jones was head of retirement and insurance policy at the Office of Personnel Management. Email your retirement-related questions to


    • When you retire any unused annual leave will be converted to cash and paid to you at the hourly rate it would have been had you continued to stay on the job. While unused sick leave has no cash value, it will be added to your actual service and, if there is enough of it, used to increase your annuity.


    I was a DOD employee and retired over 1yr ago and have not received unused annual leave payment. Can you be denied payment of unused Annual leave?

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