Tax Article - Tax Consequences of Paid Time Off Donation Policy

The IRS recently ruled on an employee leave donation program. The ruling dealt with a plan where an employee can chose to donate leave to charity under the program. The value of any leave surrendered will be gross income for the employee and treated as wages for purposes of income tax withholding and employment taxes. Employees who do not participate in the PTO Donation Policy will not have gross income merely because they have the ability to participate in it.

The Taxpayer is a corporation organized under State A's nonprofit corporation law. Taxpayer is an organization exempt from Federal income tax under § 501(c)(3). Taxpayer is involved in health care, overseeing a variety of hospitals and related health care organizations in a few states.

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Taxpayer and its individual hospitals and non-hospital affiliates (related health care organizations) each maintain a vacation or paid time-off program (collectively "PTO Programs") for their employees. Under the PTO Programs, employees earn leave that they can use for paid time off such as vacations, sicknesses and personal holidays. Leave is earned in accordance with a schedule based upon factors such as years of service, position, and full or part time status. The PTO Programs require employees to obtain approval from their employers prior to using their leave (except when advance notice is not possible, as in the case of illness), and they do not permit employees to incur a negative leave balance. Under the PTO Programs when an employee separates from service he or she receives his or her unused leave balance in a single sum cash payment. The PTO Programs provide that amounts paid to an employee for unused leave upon his or her separation from service are wages subject to income tax withholding and employment taxes.

Taxpayer proposes to supplement the PTO Programs by allowing its individual hospitals and non-hospital affiliates to adopt an employee leave donation policy ("PTO Donation Policy") that permits employees to convert a limited amount of their leave into cash donations to certain organizations described in § 501(c)(3). Under the proposed PTO Donation Policy, employees who wish to participate in the donation arrangement make a written, irrevocable choice to surrender leave to their employers on the express condition that the employers make cash payments to the charitable organizations. The value of leave surrendered under the PTO Donation Policy will be gross income to the employee who surrenders it and will be wages for purposes of income tax withholding and employment taxes. The payment to the charity will equal the value of the leave surrendered, less applicable withholding and employment taxes.

Employees who do not participate in the PTO Donation Policy will not have gross income merely because they have the ability to participate in it.

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