Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.
In Notice 2020-46, the IRS explains how employees can forgo their paid time off balances to allow their employers to make donations to charities that are assisting individuals impacted by the COVID-19 pandemic.
Under existing leave donation policies, an employee can generally elect to donate accrued but unused vacation, sick or personal leave to a leave bank, which in turn can be used to assist other employees who are impacted by either medical emergencies or certain presidentially declared natural disasters. In such cases, the leave donors are not taxed on the leave donated, while the leave recipients are taxed at their regular rates of pay.1
Notice 2020-46 expands those leave donation opportunities by allowing employees to forgo their vacation, sick or personal leave to allow their employer to make cash payments before January 1, 2021, to nonprofit organizations (to which charitable contributions are deductible under section 170(c) of the Internal Revenue Code) for the relief of victims of the COVID-19 pandemic in the affected geographic areas. Currently, all 50 states and the District of Columbia are affected areas.2
Employees electing to forgo leave will not be treated as having actually or constructively received gross income or wages (or compensation, as applicable). The amount of cash payments to which this guidance applies should not be included in Box 1, 3 (if applicable), or 5 of the Form W-2. However, electing employees may not claim a charitable deduction with respect to the value of forgone leave.
An employer may deduct these cash payments under the rules of section 170 or the rules of section 162 of the Internal Revenue Code if the employer otherwise meets the respective requirements of either section. Further, both the employer and employee will save the employment taxes associated with the leave, which is an added benefit of this leave donation program.
1 For more information on leave sharing programs, see GJ Stillson MacDonnell, William Hays Weissman, An Employer's Guide to Employee Leave-Sharing Programs, Littler Insight (Sept. 10, 2007).
2 See https://www.fema.gov/coronavirus/disaster-declarations for list of disaster declarations.