Tax Implications of Donated Leave Policies

HR practitioners are not typically tax professionals, and may run afoul when developing policies and procedures that have unintended tax implications.

For example, some organizations maintain “donated leave” policies which allow employees to donate accrued hours of paid vacation, personal, or sick leave for the benefit of other employees who need more leave than they may have available. While the employee “donating” the leave generally has nothing but good intentions, he/she may not be aware of IRS rules around the taxability of that donated leave. Under general IRS tax principles, pay that a coworker receives from using another employee’s paid time off will be taxable to the donor, in addition to the coworker who receives the donated leave. Who would have thought?!

However, there are some tax exceptions for employer-sponsored leave donation programs that should be carefully considered when creating a donated leave policy:

  1. Specify that the donated leave can only be used for medical emergencies, such as a major illness or medical condition of the employee or immediate family member that requires a prolonged absence (the IRS also approved the use of leave for extended time off following the death of a parent, child, or spouse).
  2. Ensure the recipient actually uses the donated leave for medical purposes.
  3. Employees may also use donated leave in the event of a major disaster, as declared by the President, that warrants individual or public assistance by the federal government (think Hurricane Katrina).

Keep in mind, developing a leave donation policy that meets the IRS exceptions for the donor does not relieve the tax liability of the recipient for using the donated leave in the form of wages.

For more information regarding this post or how Raffa, P.C. can help your organization, please contact the author Stacy Ganister Johnson, a member of our Human Resources Practice, at sjohnson@raffa.com or 202-955-6733.

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