Many employers have adopted or may be considering adopting PTO (paid time off) donation programs. Under these programs, employees can elect to forgo vacation, sick, or personal leave in exchange for cash value that their employer then donates in their name to charitable organizations.
In response to the need to provide relief to victims of the COVID-19 pandemic, donations of unused vacation / PTO employees make to relief organizations specifically serving those affected by COVID-19 will not be considered taxable compensation, according to a new ruling by the IRS (Notice 2020-46).
Normally, organizations can facilitate donations of employee unused PTO to any certified nonprofit, which most recently numbered over 1.2 million in the US. In these standard cases, the value of donated PTO is considered compensation and subject to normal tax withholding and treatment for the donating individual.
For example, if an employee has an hourly pay rate of $40/hr and donates 1 day to a certified 501(3)(c) charity, the total gross donation amount would be $320 (8 hrs * $40/hr). This $320 would be considered taxable compensation and additional tax withholding (at the employee’s normal withholding rate) would be reflected on the employee’s next paycheck, in addition to an 8 hour reduction of accrued PTO. Given this is considered an after-tax donation, employees can deduct this contribution on their tax returns.
Specifically, IRS Notice 2020-46 says: “Cash payments an employer makes to section 170(c) organizations in exchange for vacation, sick, or personal leave that its employees elect to forgo will not be treated as wages (or compensation, as applicable) to the employees or otherwise be included in the gross income of the employees if the payments are:
Similarly, employees electing to forgo leave will not be treated as having constructively received gross income or wages (or compensation, as applicable). Electing employees may not claim a charitable contribution deduction under section 170 with respect to the value of forgone leave.”
One of the operative words in this ruling is “section 170(c) organization.” If an employee donates to one of these organizations, their donation qualifies as a tax-exempt donation.
But what on earth is a “section 170(c)” organization?
Basically, section 170(c) organizations are organizations that can receive contributions or gifts for specific charitable or public purposes. “Section 170(c)” refers to section 170(c) of the IRS Tax Code.
Section 170(c) provides for charitable contributions to 5 categories of organizations:
See the official Section 170 tax code for reference.
All of the 501(c) sections, including 501(c)(3), describe particular types of organizations that qualify for tax exemption. Section 170(c) provides that contributions to certain types of organizations—primarily 501(c)(3)s and others where the contribution or gift meet specific criteria — are deductible by the donor as itemized deductions. Section 501(c)(3) governs tax exemption of organizations, while section 170 governs deductibility of contributions by individuals.
DISCLAIMER: This information is not intended to provide legal or accounting advice, or to address specific situations. Please consult with your legal or tax advisor to supplement and verify what you learn here.
A number of highly-rated charities have created funds to support communities around the world affected by the outbreak. Here are some examples of nonprofits specifically related to COVID-19 relief.
Center for Disaster Philanthropy
CDC Foundation
World Vision
Catholic Charities
American Red Cross
Here’s a list of recommended nonprofits providing much-needed COVID-19 relief services. These service organizations span across the following categories:
PTO Exchange has developed a flexible benefits platform that allows and facilitates donations to charitable organization as well as sharing of PTO amongst employees who need it most. Leave-sharing is one aspect of our platform that can be turned on expeditiously, as quickly as 24 hours, if the need arises.
This is a notable time with many companies making bold adjustments to their PTO strategy and trying to find new ways to help their employee community bridge the changes that are affecting their lives.
If PTO donations or leave-sharing is something that can help your organization navigate through this situation, we are here to help.
To learn more, download our free ebook, "12 Things You Need to Know About Setting Up a COVID-19 Leave-Sharing Plan."