If an employee chooses a $5,000 salary increase instead of an equivalent week of paid vacation, how is that $5,000 generally treated for tax purposes?

Answer

It is fully taxable income subject to withholding.

A direct salary increase is fully taxable income, whereas the equivalent value received as paid vacation time is generally not subject to the same immediate payroll tax burden.

If an employee chooses a $5,000 salary increase instead of an equivalent week of paid vacation, how is that $5,000 generally treated for tax purposes?
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