IRS Clarifies Tax Treatment for Leave-Based Donations to COVID-19 Charities

Employees can donate the cash value of unused paid time off

By Bruce H. Schwartz © Jackson Lewis P.C. June 18, 2020

Editor's note: A charitable leave-based donation program is an employer-sponsored program that provides employees the option to donate accrued but unused paid time off (PTO) to the employer in exchange for employer contributions to charitable organizations. Donating the value of accrued leave can be appealing to employees who don't have available cash to contribute to organizations providing help to those in need during a natural disaster, such as the COVID-19 pandemic, and who have accrued PTO they don't expect to use.

Employers typically designate certain charitable organizations to receive the cash value of the donations. Some programs let employees select specific recipients from a list of nonprofit organizations.

A charitable-leave donation program differs from a leave-donation or leave-sharing program that lets employees donate accrued PTO to fellow employees who experience medical emergencies or who are affected by major disasters and have exhausted all paid leave available to them.
-- SHRM Online

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Coronavirus and COVID-19

On June 11, IRS Notice 2020-46 addressed the tax treatment of employees who elect to have their employers donate unused sick, vacation or personal leave as cash payments to charitable organizations that provide relief to people affected by the COVID-19 pandemic.

The notice provides that the donated leave will not be treated as W-2 wages earned by the donating employees.

  • The donated leave should not be included in Box 1 (wages subject to income tax), Box 3 (wages subject to Social Security tax) or Box 5 (wages subject to Medicare tax) of the Form W-2.
  • Similarly, the employees will not be treated as receiving the value of the leave as income and cannot claim a deduction for the leave that they donated to their employer.
  • An employer making the cash payments of the donated leave to a charitable organization may deduct these cash payments as a business expense or claim a charitable contribution deduction for the payments.

The tax treatment provided by the notice is essentially identical to prior IRS guidance regarding leave-based donations made regarding Hurricane Harvey and Tropical Storm Harvey, Hurricane Irma and Tropical Storm Irma, and the Ebola Virus.

Bruce H. Schwartz is a principal in the White Plains, N.Y. office of law firm Jackson Lewis P.C. © 2020 Jackson Lewis P.C. All rights reserved. Reposted with permission.

Related SHRM Articles

Emergency Relief Funds Throw Employees a Lifeline During Pandemic, SHRM Online, April 2020

Using Leave-Sharing Plans During the COVID-19 PandemicSHRM Online, March 2020

[SHRM members-only how-to guide: How to Create a Leave Donation Program]



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