Author: Rena Pirsos, XpertHR Legal Editor

Due to the extreme need for charitable relief to victims of Hurricane Sandy, the Internal Revenue Service (IRS) has issued guidance on the federal income and employment tax treatment of leave-based donation programs adopted by employers for this purpose.

Under such programs, employees elect to forgo vacation, sick or personal leave in exchange for cash payments an employer makes on their behalf to charitable organizations described in § 170(c) of the Internal Revenue Code (IRC).

Specifically, the IRS will not treat such employer cash payments as gross income or wages to the employees if the payments are made to the +IRC § 170(c) organizations before January 1, 2014. Employers need not report the cash payments on employees' Forms W-2, Wage and Tax Statement, in Box 1 (Wages, tips, other compensation), 3 (Social Security wages, if applicable) or 5 (Medicare wages and tips).

Employees making the election may not claim a charitable contribution deduction on their personal income tax returns for the value of foregone leave excluded from their compensation and wages. Employers, however, are permitted to deduct these cash payments under +IRC § 162 as a trade or business expense.

The following are the charitable organizations listed under +IRC § 170(c) to which employers may make the cash donations:

  • The federal government or a state government and their political subdivisions;
  • Certain corporations, trusts, or community chests, funds or foundations;
  • Certain war veterans' organizations;
  • Certain domestic fraternal groups; and
  • Certain cemetery companies and burial corporations.

Twice - after the September 11, 2001, attacks and Hurricane Katrina in 2005 - the IRS has allowed employees who are not themselves impacted by a major disaster to cash out accrued time, which employers donated to tax-exempt relief organizations. The IRS only allows this relief on a disaster-by-disaster basis and may provide additional relief as needed as it continues to monitor the situation.

IR-2012-88 and +Notice 2012-69, Nov. 6, 2012.

Additional Resources

Payroll > Taxation of Employee Compensation > Leave-Sharing Plans