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IRS Guidance States Certain Donated Paid Time Off is Taxable

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Lauren B. Dunn
Foster Swift Employment, Labor & Benefits Quarterly
Fall 2010

The IRS recently issued guidance regarding whether paid time off ("PTO") credits donated under an employer-sponsored leave-sharing program are taxable to the donor employee if the donation is made by waiving the PTO credits before the PTO is earned. The guidance states that in this situation, the donor employee would not be able to avoid taxation because the donation would be an anticipatory assignment of income and therefore, taxable income to the donor employee.

The guidance, however, does state that donor employees could avoid tax on their donations if their employer-sponsored leave-sharing program complied with the current IRS guidelines permitting PTO donations for medical emergencies of other employees. A medical emergency is one that requires an employee’s prolonged absence from work, resulting in a substantial loss of income because the employee has exhausted all of his otherwise available paid leave. Employees donating PTO credits under a medical emergency leave-sharing plan would be permitted to designate the recipient employee, without being taxed on the donation.

Nontaxable donations are also available under an IRS approved "major disaster" leave-sharing plan. In that case, an employee donating PTO credits under a "major disaster" leave-sharing plan would not be permitted to designate specific recipients of the donated leave.