IRS Greenlights Funding Employer COVID-19 Charitable Contributions from Employee Leave Donations
A recent IRS announcement outlines how employees can forgo their paid time off balances to allow their employers to make donations to charities assisting individuals impacted by the COVID-19 pandemic.
Under existing leave donation policies, employees can generally elect to donate accrued - but unused - vacation, sick or personal leave to a leave bank. Leave banks can be used to assist other employees impacted by either medical emergencies or certain president-declared natural disasters. In these cases, leave donors are not taxed on the leave donated, while the leave recipients are taxed at their regular rates of pay.
IRS Notice 2020-46 expands leave donation opportunities to permit employees to forgo their vacation, sick or personal leave to allow employers 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 COVID-19 pandemic relief.
Section 170(c) organizations include charities and governmental units that use the donation solely for a public purpose. While not explicitly mentioned in the IRS notice, the use of the phrase “victims of the COVID-19 pandemic” can be interpreted that the permissible use of the donations extends not only to assist people who contract the disease, but also to people who lose their jobs or are otherwise financially harmed by the pandemic.
Employees who choose to forego leave may not claim a charitable contribution for the payment made by the employer. 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. Both the employer and employee will save the employment taxes associated with the leave, which is an added benefit of this leave donation program.
Additionally, employees who forgo leave will not be treated as having 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.
- Paid leave that an employee foregoes does not translate to immediate cash, but rather to future potential savings, assuming the employee would otherwise use the paid leave.
- Due to COVID-19 uncertainty, employees may be reluctant to give up paid sick leave or leave under a paid time off policy that an employee can use as sick leave.
- Employers who want to implement a leave-donation policy should ensure that they comply with laws that might either place restrictions on giving up paid leave or require that employers provide minimum amounts of paid sick leave.
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