BACKGROUND:

I am about to leave my current job, and I expect 22 work-days of Paid
Time Off (vacation/sick) to be paid to me in one lump sum with my last
paycheck.  This lump sum will make my last paycheck more than triple
the bi-weekly paycheck I previously received.  (I have an annual
salary of $50,000, work 8-hour days, and have 176 hours of PTO.)

I am told that federal tax will be calculated and withheld as if this
amount were my usual bi-weekly income.  This would easily bump my last
paycheck into a higher tax bracket, causing a LARGE amount to be
withheld automatically, since I am not married and my W-4 lists only
myself as a dependent (1 total).


QUESTION:

Is there any way I can prevent this paycheck from being taxed at this
higher tax rate?  (My company will not spread out the PTO payment, but
that they will only give it to me in one lump sum.)

I have been told that I could increase my "withholding allowances" on
my IRS Form W-4, but since nothing but my lump sum payment has changed
in my financial/family situation, I am afraid this is not legal.  Is
it legal?


SOURCES:

I have already consulted the IRS publications 919 and 505, linked
below, but still cannot figure out if a lump sum of PTO would qualify
as a "decrease to income not subject to withholding" or if I should
even bother with trying to justify a change to the W-4.

IRS Publication 919 - How Do I Adjust My Tax Withholding?
http://www.irs.gov/pub/irs-pdf/p919.pdf

IRS Publication 505 - Tax Withholding and Estimated Tax
http://www.irs.gov/pub/irs-pdf/p505.pdf

IRS FAQ on the W-4
http://www.irs.gov/govt/fslg/article/0,,id=112714,00.html

You are allowed to put in any number of withholding deductions you
want.  The IRS only cares that you come out with an approximately
correct amount of withholding.  When you file your taxes, you are only
assessed a penalty if you owe $1,000 or more and did not withhold 90%
of last year's tax liability.  So, there is no legal issue for you to
be concerned about as far as I know.

However, the logistics may be more difficult.  At employers I have
worked for, it can take 1-2 pay periods before a new withholding level
is put into effect due to paperwork and other processes. So, your
problem, depending on when you will be quitting, is whether or not
they could process this in time for your last paycheck.

You can specifiy on your W-4 form exactly the amount (either exactly
or in a percentage) you want withheld.  I've been doing it for the
past year.  If they treat the lump sum like a regular bi-weekly check,
the same rules should apply.  Check with your company's human
resources or payroll contact.

However, like research_help-ga stated, it might take a few pay periods
for that to take effect, so act fast.