When you leave Maryland state service, a Maryland state employee leave payout covers your unused annual leave, and only annual leave in any real dollar amount. Personal leave disappears at separation. Sick leave never pays out as cash, though it can convert to retirement service credit if you retire rather than resign. Compensatory leave pays out under narrow rules that depend on whether you are covered by the Fair Labor Standards Act. The size of your annual leave check is set by a statutory formula that caps prior-year carryover at 50 days, which is the number that most often catches departing employees off guard.
How the Annual Leave Payout Is Calculated
The formula does not simply multiply your hourly rate by every unused hour on your books. It uses one-tenth of your established biweekly compensation at the time you leave, which works out to your daily rate because a biweekly pay period covers 10 working days.
That daily rate is applied to two buckets of unused leave added together:
- Prior-year carryover, capped at 50 days or 400 hours
- Current-year accrual, with no separate cap beyond your accrual entitlement
You can carry over up to 75 days from one calendar year to the next,1Cornell Law School. Md. Code Regs. 14.27.02.11 – Annual Leave but only 50 of those days count toward your separation payout.2Maryland General Assembly. Maryland State Personnel and Pensions Code 9-305 – Unused Annual Leave — Compensation on Termination of Employment Anything above 50 days in that carryover bucket is lost money at separation, even though it was legitimately accrued and legitimately carried forward.
A concrete example. Suppose you earn $1,500 biweekly and leave in June. You carried 60 days from the prior year and used none, and you accrued 10 new days this year. Your daily rate is $150. Your payout covers 50 prior-year days (not 60) plus 10 current-year days, for 60 eligible days at $150, or $9,000 gross. The extra 10 carryover days generate nothing.
If a raise takes effect before your last day, the higher biweekly rate applies. If you recently moved to a lower-paying position, the lower rate governs. Payroll records determine which rate is used.
Who Qualifies for a Payout
The annual leave payout provisions apply to employees in the State Personnel Management System. They do not cover temporary employees, or employees of the Maryland School for the Deaf who work 11 months or less per year.3Maryland General Assembly. Maryland State Personnel and Pensions Code 9-301 – Annual Leave Authorized Contractual employees and certain appointed officials may fall outside the standard framework depending on the terms of their employment.
How you leave matters too. Voluntary resignations and retirements produce a straightforward payout. Employees terminated for cause may still receive payment for unused annual leave, though outstanding financial obligations to the state can be deducted from the final amount. Employees who transfer between state agencies without a break in service do not receive a payout at all; their accrued leave moves with them.
Personal Leave Does Not Pay Out
Personal leave is not paid out at separation under any circumstances. Full-time state employees receive 7 personal leave days per calendar year, or 8 in a leap year, and unused days do not carry over.4Cornell Law School. Md. Code Regs. 11.02.03.04 – Personal Leave If you know your departure date, use those days before your last day of work.
Compensatory Leave
Compensatory leave payouts depend on your classification, and the gap between categories can be dramatic.
For non-exempt employees covered by the Fair Labor Standards Act, federal law requires that unused compensatory time be paid out at separation. The rate is the higher of your final regular rate or your average regular rate over the last three years of employment.5eCFR. 29 CFR 553.27 – Payments for Unused Compensatory Time Maryland law incorporates these FLSA protections, entitling employees to whichever rules give the greater benefit.6Justia. Maryland State Personnel and Pensions Code 8-302
For exempt employees, the picture is far tighter. Some Maryland agencies cap the payout at 25% of unused compensatory leave, with total payment not to exceed 5 days.7Cornell Law School. Md. Code Regs. 11.02.03.06 – Compensatory Leave Some agencies also impose expiration periods on comp leave, so time can be forfeited well before you separate. Check your agency’s specific regulations early.
Sick Leave: Retirement Credit Instead of Cash
Unused sick leave never converts to cash at separation. If you retire from state service, it converts instead into creditable service toward your pension at a rate of 22 days of unused sick leave for each month of service credit. To receive the credit, you must retire within 30 days of separating from a participating employer, and your sick leave balance must be verified to the Board of Trustees.
The math can matter. An employee retiring with 220 unused sick days gains 10 additional months of creditable service. Employees who resign without retiring, or who are terminated, forfeit the benefit entirely. If you are close to retirement eligibility, the difference between resigning and retiring is one of the more consequential decisions in the separation process.
Taxes and the 457(b) Deferral Option
Your leave payout is taxable income, subject to federal and Maryland income tax, Social Security, and Medicare. Because the lump sum is paid on top of your regular wages, the IRS treats it as supplemental wages. Your employer can withhold federal income tax at a flat 22% on supplemental wages below $1 million, and 37% above that threshold, rather than following your W-4 elections.8Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide The Maryland Central Payroll Bureau handles these withholdings automatically.9Comptroller of Maryland. Payroll – Comptroller of Maryland A large payout can also push your total taxable income into a higher bracket for the year.
Maryland state employees can defer part of the payout directly into the state’s governmental 457(b) deferred compensation plan to soften the tax hit. You can contribute up to 85% of the payout as before-tax deferrals and up to 50% as Roth contributions.10Maryland Department of Budget and Management. Annual Leave Deduction Agreement Governmental 457(b) Plan
The 457(b) contribution limit is $24,500 for 2026. Employees aged 50 and over can add $8,000 in catch-up contributions, for a total of $32,500. Employees aged 60 through 63 qualify for a higher catch-up of $11,250 above the base, bringing their ceiling to $35,750.11Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500 A deferral request that exceeds the limit without an eligible catch-up election will be rejected.
Timing controls whether this option is even available to you. You must already have an active account in the plan, and the deferral form must be submitted at least 45 days before your last day of work. Contact your agency’s payroll office at least 60 days before separation to get the exact dollar amount of your unused leave and the pay period in which it will be disbursed. Miss those deadlines and the whole payout hits your final paycheck fully taxable.
Requesting the Payout and Fixing Errors
Submit a payout request through your agency’s human resources department, typically as part of a separation form that captures your last working day and any required approvals. If you plan to defer any portion into the 457(b), that form is separate and has its own 45-day deadline.
Once processed, the request goes to the Maryland Central Payroll Bureau, which verifies your leave records and schedules the disbursement. Most payouts arrive in the final paycheck or within one to two pay cycles after. Confirm your direct deposit information before you leave; outdated banking details are one of the most common causes of delay.
If the final earnings statement shows a wrong leave balance, an incorrect rate, or a missing payout, notify HR in writing and attach documentation: pay stubs, leave accrual records, prior earnings statements. Most calculation errors are resolved at that level. If the agency does not fix the problem, you can file a formal grievance under state law, which defines a grievance as a dispute over the application of a personnel policy or regulation to an individual employee.12Maryland General Assembly. Maryland State Personnel and Pensions Code 12-101 A denied grievance can be appealed to the Office of Administrative Hearings, where an administrative law judge issues a binding decision.
Payouts After an Employee’s Death
When a state employee dies with unused annual leave on the books, the payout goes to the estate or designated beneficiary, and the tax treatment turns on when the payment is issued relative to the year of death.
If the payout is made in the same calendar year the employee died, the employer withholds Social Security and Medicare but not federal income tax, and the payment does not appear in Box 1 of the W-2. If the payout is made after the year of death, no Social Security or Medicare taxes are withheld either. In both cases the employer reports the payment to the estate or beneficiary on Form 1099-MISC rather than a W-2.13IRS.gov. IRS Resource Guide – Decedents and Related Issues The estate or beneficiary then reports the income on their own return. Families should contact the agency’s HR office promptly, since payroll deadlines affect both the withholding and the reporting form.