It’s becoming increasingly popular for employees to donate unused PTO, either for fellow staff members in need or to their favorite charity through a corporate CSR program. Like all corporate programs designed to help employees give back to their communities, employee leave sharing programs may benefit the employer by enhancing the employee morale and camaraderie.
What is an Employee Leave Sharing Program?
Leave sharing programs allow employees to donate accrued paid time off (PTO), vacation or sick leave to a general pool to be used by fellow employees who experience medical emergencies or who are affected by major disasters and have exhausted all paid leave available to them. Employees are often searching for ways to help fellow employees following these emergencies and leave sharing programs can offer immediate assistance to those in need.
Steps to Take When Creating a Leave Share Program:
- Outline the process for giving and receiving leave and the criteria for eligibility to participate
- Set up a PTO donation “bank” and a process for tracking the time off. This will ensure that donated leave is available to all qualifying workers
- Understand the associated costs and work with your finance department to budget for these programs and estimate outlays for the calendar year
- Make sure you have the software system in place to track the time donated by the employee, the application and disbursement process
- Know that unused donated leave at the end of the year may become a liability by increasing your company’s payroll expenses but can be returned to the donating employee
- Remember that workers have different pay scales and workers donating leave may receive a higher or lower hourly rate of pay than the employees receiving the transferred time. When someone receives leave from a worker with a different rate of pay, the donated time should be converted to reflect the recipient’s compensation rate
Employee Leave Sharing Tax Implications
Depending on which leave-sharing program you administer, there can be tax implications that should be shared with all participating employees prior to donating their unused PTO. Whether using PTO in a leave sharing program or as a charitable contribution, employers should be aware of their responsibilities, including the requirements from the IRS on “Leave Sharing Programs.”
- Standard Leave-Sharing Banks to Benefit Fellow Employees
- Employer is responsible for tax withholding at the time the PTO donation is administered
- Donating employees will see additional withholdings on their pay check when the donation is administered
- Donating employee cannot take a charitable tax deduction
- Receiving employee needs to declare this as income
- Major Disaster Leave-Sharing Plan (used by employees adversely affected by any presidentially declared major disaster – restrictions in the plan outlined by the employer)
- The employer is not required to administer withholding taxes at the time the PTO donation is administered
- Donating employee will not see additional withholdings on their pay check when the donation is administered
- Donating employee cannot take a charitable tax deduction as no taxes were withheld and the receiving employee is not a charitable 501c3
- Receiving employee must declare this as income
- Medical Emergency Leave-Sharing Plan (used by employees with medical emergencies – restrictions in the plan outlined by the employer)
- The employer is not required to administer withholding taxes at the time the PTO donation is administered
- Donating employee will not see additional withholdings on their pay check when the donation is administered
- Donating employee cannot take a charitable tax deduction as no taxes were withheld and the employee is not a charitable 501c3
- Receiving employee must declare this as income
Even with the potential concerns outlined above, leave-sharing programs are an excellent way for employees to genuinely help their fellow co-workers while fostering camaraderie among those facing family emergencies or disasters.
Employee Leave Donation Programs using PTO
Allows employees to forgo their accrued paid leave in exchange for cash donations the employer makes to a charitable organization. The employer gives cash to the charitable organization equal to the value of the donated PTO.
Charitable Donation Programs are a little easier to administer than leave sharing programs - simply because the employee is donating the unused time to a specific charity and there is less administration. The company still needs to understand the equivalent cash amount to donate, but it no longer needs to administer a “bank” of hours with an employee application process and eligibility tracking – something they need to do when establishing donated “leave banks” for employees.
They also don’t need to worry about the differences between a donating employee’s hourly rate and the receiving employees PTO as the charities should receive the equivalent amount of donated hourly pay.
Donating leave for a charitable cause is very popular in CSR programs and can benefit the donating employee, the charity and the company:
- Employees view donating PTO as a painless process because there is no cash out of pocket (see tax consequences below) and the gift can often be a larger donation than employees would otherwise give. Eight hours of pay can be a significant contribution to a charity
- These programs are a good way for a company to reduce its liability for having too much unused PTO on the books
Some things to consider before offering this as an option to employees:
- Does the corporation have enough cash on hand to pay out the PTO donated?
- Is there a limit to how much PTO each employee can donate?
- What is the time frame for when an employee can donate their PTO (is it at a specific time of year, a specific campaign or is it a total amount that can be donated per fiscal or calendar year?)
- Does the company have the software in place to track these donations?
Tax Implications on Employee Leave Donations Using PTO
As unlikely as it may sound, except in certain circumstances described below, donating PTO generally results in a taxable event for the donating employee but they are able to declare the tax deduction at the end of the calendar year.
- Standard PTO Charitable Donation Program
- Employer is responsible for tax withholding at the time the PTO donation is administered
- Donating employee will see additional withholdings on their pay check when the donation is administered
- Donating employee can take a Charitable Tax Deduction
- Eligible Disaster Relief PTO Charitable Donation Programs
- Employer does not administer tax withholding at the time the PTO donation is administered (IRS waives the assignment-of-income doctrine)
- Donating employee cannot take a Charitable Tax Deduction (no taxes were withheld)
Along with leave sharing programs, charitable programs enabling employees to donate PTO, contribute to a company’s overall CSR program.
Whether enabling the “charitable act” from employees to benefit company staff or an outside charity, offering these programs creates a tremendous amount of good will from the staff. Leave sharing and donating programs demonstrates a company’s compassion and desire to improve society in some way. As with all CSR programs, it can help build a positive reputation for the brand and a desirable place for top talent to seek employment.
