Many employees have unused vacation time or other accumulated leave and would like to exchange this unused time for a cash contribution made by their employer to help others in their community. A leave-based donation program is an employer sponsored program which allows employees to forego some of their accumulated leave hours (sick, PTO, vacation). In exchange, the employer makes a cash payment to a qualifying tax-exempt charitable organization.
In normal circumstances, employees would be taxed on the donated leave as if earned, and then paid over to the charity themselves. However, in times of disaster the IRS can permit an exception to recognition of wage income, if cash donations are made to a charitable organization specifically to be used for disaster relief. Employees are not able to claim a charitable contribution deduction for the amounts contributed. The employer is allowed a deduction for its payments as a charitable contribution or as a business expense. Such amounts will not be subject to employment taxes — a savings for both the employer and the employee.
During the COVID-19 pandemic the entire United States has been declared a disaster area. Notice 2020-46 and Notice 2021-42 invoke the special rules discussed above for disasters. Under an employer’s leave-based donation program, employees can forgo vacation, sick and personal leave in favor of assisting victims of the pandemic. The employee avoids current taxation as long as the employer contributes amounts to a qualifying charitable organization for COVID-19 pandemic disaster relief. Contributions must be paid before January 1, 2022 and benefit pandemic victims in the United States and the five 5 U.S. territories.
This relief from taxation was originally set forth by the IRS in Notice 2020-46, with a December 31, 2020 expiration date. Notice 2021-42 extends the rules through 2021.
Talk with your Cherry Bekaert professional to learn more about leave-based donation programs.
