Organizations with employees interested in donating or transferring their sick time to colleagues should be aware of specific stipulations surrounding leave donation programs. A program like this allows employees to donate accrued paid time off (PTO), vacation, or sick leave to fellow employees who’ve used all available paid leave.
Such policies can boost morale and retention. Yet, it’s important to recognize the individual who earns PTO is obligated to pay taxes on it — whether they receive it as income or donate it. That means any leave earned by one employee but given to someone else would be taxable to both parties, unless:
- The time is being granted for use during a medical emergency. The IRS defines a medical emergency exception as “a medical condition of the employee or a family member that will require the prolonged/extended absence of the employee from duty and will result in a substantial loss of income to the employee due to the exhaustion of all paid leave available, apart from the leave-sharing plan.”
- The time is being donated to someone affected by a major disaster. The major disaster exception is defined as “a disaster declared by the President under §401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act (the Stafford Act) or as a major disaster or emergency declared by the President according to 5 U.S.C. §6391 for federal government agencies.”
Under these two exceptions, leave can be shared without adverse tax consequences to the donor. Any leave given to the recipient employee is still considered wages and is subject to the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), and other required tax withholdings. Plans should be solidified in writing and should include elements such as:
- Policy statement
- Employee/employer eligibility
- Guidelines – i.e., whether or not you’ll be using the medical emergency or major disaster exceptions, or both
- Donation and request instructions
For more information on building a PTO sharing program, see the Society for Human Resource Management how-to guide: How to Create a Leave Donation Program.
Please Note: On June 11, 2020, the Internal Revenue Service (IRS) released Notice 2020-46 to provide tax guidance on employer leave-based donation programs that aid victims of the COVID-19 pandemic. An employee may elect to forgo vacation, sick, or personal leave in exchange for cash payments that the employer makes to charitable organizations for relief of victims of the COVID-19 pandemic. The notice clarifies that the value of the accrued time the employee donates is not considered gross income or wages and should not be included on the employee’s W-2. Additionally, the employee cannot claim a deduction for the charitable donation.
The value of the donated vacation, sick, or personal leave must be paid as follows:
- Payments must be made to a section 170(c) organization for the relief of victims of the COVID-19 pandemic in the affected geographic areas—the 50 states, the District of Columbia, and five U.S. territories.
- Payments must be made before January 1, 2021.
The IRS provided further guidance for employers making these cash payments, stating they may claim them as a business expense (Section 162) or as a charitable contribution deduction (Section 170) if the employer otherwise meets the requirements of the respective sections.