Donating and Sharing Paid Time Off

Hurricane Sandy highlighted the role of programs that allow employees to donate the value of their unused paid time off (PTO) from work or share it with fellow employees. Following are the main types of programs and their tax treatment. STANDARD PTO CHARITABLE DONATION PROGRAMS In this type of program, employees may donate the value of their unused or unwanted PTO to a charitable organization. The employer typically pays the organization cash equal to the value of the donated PTO, which the donating employee generally must recognize as taxable compensation income that is subject to income tax and FICA withholding. The amount the employer withholds must be deducted from the employee's wages, which will reduce the employee's paycheck in the pay period the donation is made. To avoid reducing the employee's paycheck, the employer may "gross up" the employee's pay so that the employee's after-tax pay is not reduced, or the employer may reduce the donation by the amount required to be withheld. Because the value of the PTO is donated to a charitable organization, the donor employee is allowed a charitable contribution deduction under Sec. 170. The employer is allowed a deduction for the value of the donation as compensation expense under Sec. 162. DISASTER RELIEF PTO CHARITABLE DONATION PROGRAMS In certain situations, the IRS has allowed employees to avoid recognizing the value of PTO donated to a charitable organization as compensation income. The most recent of these situations was in the aftermath of Hurricane Sandy. In Notice 2012-69, the IRS provided that employees who donate unused PTO under a program in which the employer contributes the value of the PTO before Jan. 1, 2014, to a Sec. 170(c) charitable organization for the relief of victims of Hurricane Sandy will not be required to recognize compensation income for the value of the donated PTO. Because the employee does not include the value of the donated PTO in income, he or she is not allowed to take a charitable contribution deduction. The IRS will not assert that the employer will be permitted to deduct the cash payments only under Sec. 170 as a charitable deduction but will allow the employer to deduct the payments as compensation under Sec. 162. Previously, the IRS authorized disaster relief PTO programs in response to Hurricane Katrina (Notice 200568), and the Sept. 11, 2001, terrorist attacks (Notice 200169). STANDARD LEAVE-SHARING BANKS In another type of program, an employee surrenders an amount of unused accrued PTO that the employer places in a leave-sharing bank. Other employees who have run out of PTO can then draw on the bank for reasons specified by the employer. As with the standard PTO charitable donation program, the employee who surrenders the PTO is required to recognize taxable compensation income equal to the value of the surrendered PTO, unless the arrangement qualifies as one of the two types of leave-sharing plans discussed below. The donating employee is not entitled to a charitable contribution deduction because he or she does not make a contribution to a charitable organization. …