PTO sharing is a generous perk, but could present tax concerns next year

August 5, 2020 5:30 AM

Not everyone can afford to donate money to help their struggling coworkers and favorite charities; but with PTO sharing benefits, employees can donate their vacation time.

“These programs are great for employee morale because employers that have these programs demonstrate great community stewardship,” says Tiffani Greene, employee benefits attorney at Fisher Phillips, a nation-wide employment law firm. “It’s natural that people want to donate to charity, or help out one of their peers, but it’s not always possible for them to donate out of pocket. It’s often easier to donate vacation because it’s employer-sponsored.”

Greene says she’s seeing more employers approach her and her colleagues about PTO donation programs in light of the COVID-19 crisis. According to Willis Towers Watson, 42% of employers plan to alter their PTO policies out of concern employees won’t use theirs during the pandemic.

While these programs are beneficial for workforce morale, Greene warns employers to consult their legal counsel as they build them — or their employees could receive an unwelcome surprise during the next tax season.

“There's increased interest [in PTO sharing] every time we have a challenge or natural disaster because people naturally want to give — COVID-19 is no different,” Greene says. “They’re a great way for employers to support their community and employees, but they have to be done correctly to avoid problems with taxes.”

Greene shares the three different types of PTO-sharing programs and the restrictions employees should be aware of.

Donating to charity:

With a charitable giving program, the employee forgoes vacation and the employer and employee work together to select an organization to receive the funds they would’ve gotten had they taken PTO.

RESTRICTIONS: Employees receive donated PTO at their own salary rate, not that of the donor’s. The general rule is if you donate leave, you’re still taxed on W2 wages and employment taxes, unless you have a leave donation program. When done correctly, the donor isn’t taxed on what they donate at all.

Donating to a company fund:

Employees can also opt to donate vacation days to a company fund that distributes the gifted days to employees directly affected by major disasters. For example, the IRS has approved COVID-19 and California wildfires as eligible for PTO donation under major disasters.

RESTRICTIONS: You want to get a benefits attorney to help you structure the program to help you administer it. Most employers have someone in HR track the donations and make sure all the paperwork is turned in. Employers often work with payroll vendors to make sure they’re tracking the hours.

Companies really need to make sure the person they hire to do this is capable of upholding policies and ensuring donated PTO doesn’t keep going to the same people — that could be deemed discriminatory.

Medical emergency PTO sharing:

Employees donate their vacation days to specific colleagues, assuming the employer wants to structure it that way.

RESTRICTIONS: But in order for an employee to receive donated PTO, they have to fill out forms detailing their medical emergency. They also have to have lost a lot of time from work and used up their own PTO in order to qualify for donations. If they’re requesting medical emergency leave for a COVID-19 related situation, for example, they’d also have to use up the paid leave they’re allotted from the Families First Coronavirus Response Act.