IRS Guidelines on PTO Donations: Leave-Sharing Programs and Tax Rules

PTO donation IRS guidelines cover three distinct program structures, and each one taxes the donor, the recipient, and the employer differently. The IRS recognizes medical emergency leave-sharing plans under Revenue Ruling 90-29, major disaster leave-sharing plans under Notice 2006-59, and leave-based donation programs that convert forfeited leave into employer cash payments to charity. In every qualifying version, the donating employee stays out of tax on the surrendered hours. What changes is whether the recipient is taxed, whether payroll taxes apply, and what the employer must put in writing to keep the favorable treatment.

The Three Programs the IRS Recognizes

Before matching a program to your situation, know which lane you are in. A medical emergency plan pays a coworker facing a serious personal or family health crisis. A major disaster plan pays coworkers affected by a Presidentially declared disaster under the Stafford Act. A leave-based charitable donation program is not a coworker transfer at all: the employer converts forgone leave into a cash gift to a qualifying charity. The tax rules for each are separate and do not cross over.

Medical Emergency Leave-Sharing Plans

Revenue Ruling 90-29 has governed these plans since 1990. Employees surrender accrued leave to an employer pool or directly to a coworker who meets the plan’s eligibility criteria.¹

The IRS defines a qualifying medical emergency as a medical condition of the employee or a family member that requires a prolonged absence from work and results in a substantial loss of income. Routine appointments and minor injuries do not qualify. Before a recipient can draw from the pool, they must first exhaust all of their own accrued paid leave (personal, vacation, and sick), submit a written request, and get the absence approved by the employer.²

The plan must be a formal written document in place before any transfers occur. Several structural rules keep it from becoming a backdoor pay arrangement:

The donor cannot receive anything of value in exchange for surrendering leave.
The plan should cap how much any one employee can donate.
A recipient cannot accumulate more donated leave than their medical situation reasonably requires.
If the recipient dies, retires, or otherwise leaves before using the donated hours, the remainder returns to the pool or to donors proportionally.²

The recipient is paid at their own regular rate, not the donor’s rate, and the employer treats the payments as ordinary wages includible in the recipient’s gross income.² The donor recognizes no income and gets no deduction.

Major Disaster Leave-Sharing Plans

Notice 2006-59 authorizes a different arrangement when the President declares a major disaster under the Stafford Act. Employees deposit accrued leave into an employer-sponsored bank for coworkers adversely affected by the specific disaster. The IRS has confirmed the framework applied to events ranging from hurricanes to the COVID-19 pandemic.³

The written plan must meet each of these requirements:¹

Donors deposit into an employer-sponsored bank and cannot designate a specific recipient.
Leave deposited for one declared disaster can only be used by employees affected by that disaster.
A donor generally cannot contribute more than the leave they would normally accrue in a single year.
The plan sets deadlines, based on the disaster’s severity, for depositing and using leave.
The employer makes a reasonable, need-based determination of how much each approved recipient may receive.
Recipients cannot cash out donated leave, though they can use it to offset a negative balance caused by the disaster.
Unused leave at the deadline returns to donors proportionally within a reasonable time.

Unlike medical plans, disaster plans do not require the recipient to exhaust their own paid leave first. An employee qualifies if the disaster caused severe hardship requiring an absence from work.

The IRS has stated it will not assert that depositing leave in a disaster bank causes the donor to realize income or wages.¹ On the recipient’s side, treatment turns on whether the payments also qualify as disaster relief under Internal Revenue Code Section 139, which excludes from gross income any “qualified disaster relief payment” an employer makes for reasonable and necessary expenses resulting from a federally declared disaster.⁴ Payments meeting Section 139 are also outside wages for employment tax purposes. Payments that do not meet Section 139 are taxable wages like any other paid leave.

Leave-Based Donations to Charitable Organizations

This third structure is not a coworker transfer. Employees forgo accrued vacation, sick, or personal leave, and the employer converts that leave into a cash payment to a qualifying charitable organization. The IRS has authorized these programs through disaster-specific notices, most recently for pandemic-related relief.⁵

Under a qualifying program, the IRS will not treat the cash payment to the charity as gross income or wages of the employee who gave up the leave.⁶ The amount is not reported in Box 1, Box 3, or Box 5 of that employee’s Form W-2. The employer deducts the cash payment as a business expense, not as a charitable contribution.

Here is the catch that trips people up. The donating employee cannot claim a charitable contribution deduction for the value of the forfeited leave. In the tax code’s view, the leave was never the employee’s money to give; the employer made the payment. An employee who wants a deduction should keep the PTO and make a separate personal donation instead.⁶

Each authorizing notice sets a specific deadline for the employer to make the cash payment. Notice 2021-42, for example, extended the deadline for COVID-related leave-based donations through December 31, 2021.⁷ Payments made after the applicable deadline lose the favorable tax treatment, and the value of the forfeited leave becomes includible in the donating employee’s income.

What the Donor Owes in Every Case

Across all three structures, the donor’s outcome is the same when the plan is compliant: the value of surrendered leave stays out of gross income, and no withholding is triggered at donation or when a recipient uses the leave.²¹

The other side of that coin: the donor gets no deduction. No charitable contribution deduction, no expense deduction, no loss deduction for the donated hours. The transaction is treated as if the leave simply left the donor’s account with no tax consequence in either direction.

The risk to watch for is compliance failure. If a disaster-relief program misses its deadline or fails to meet notice requirements, the IRS can assert the donated leave was constructive income to the donor all along, and the employer would have to add the value to the donor’s Form W-2. The donor had no control over any of that, which is why the employer’s paperwork discipline matters to everyone in the plan.

What the Recipient Owes

Medical Emergency Plans

The recipient pays tax on every dollar received. The employer treats the cash value of donated leave as regular wages includible in gross income under Section 61. The payments are subject to federal income tax withholding, Social Security tax (6.2% on wages up to $184,500 in 2026), Medicare tax (1.45% with no wage cap), and Federal Unemployment Tax.²⁸ The amount lands in Box 1 of the W-2 and flows through the employer’s quarterly Form 941 like any other payroll.⁹ Think of it as replacement wages: the employer is paying for time the recipient would have worked but for the medical emergency.

Disaster Relief Plans

The recipient’s tax picture depends on how the employer structures the payment. Amounts that qualify as disaster relief under Section 139 are excluded from gross income entirely and are also outside Social Security, Medicare, and unemployment taxes.⁴ They should not appear in Box 1 of the W-2, though employers sometimes note them in Box 14 for information.

To qualify under Section 139, the payment must cover reasonable and necessary personal, family, living, or funeral expenses caused by the declared disaster, and the expenses cannot already be covered by insurance or another source. Any portion of a payment that exceeds documented necessary expenses becomes taxable. Employers who want to deliver the tax-free result need to tie each recipient’s payments to actual disaster-related expenses.

Employer Requirements That Preserve the Tax Treatment

The favorable tax outcomes depend on paperwork the employer has to have in place before any leave changes hands. The written plan document is not optional. For medical emergency plans it must spell out eligibility criteria, donation limits, the leave-exhaustion requirement, and what happens to unused leave. For disaster plans it must contain each of the Notice 2006-59 elements listed above.

Recordkeeping is where programs most often fail under IRS examination. The employer needs to document:

Each donor’s identity and hours donated
Each recipient’s identity and amount paid
For medical plans, verification of the qualifying medical emergency, typically a healthcare provider’s certification similar to FMLA documentation
For disaster plans, evidence that each recipient was adversely affected by the specific declared disaster

The plan also must operate on a nondiscriminatory basis and cannot disproportionately benefit highly compensated employees, defined for 2026 as those earning more than $160,000 in the prior year.¹⁰ Uniform donation and receipt limits that apply to all employees are the cleanest way to meet that standard. A program that lets executives donate unlimited leave while capping frontline workers invites scrutiny.

How These Programs Interact With FMLA and ADA

Donated leave does not sit outside other leave laws. When a recipient also qualifies for FMLA job-protected leave, the paid donated leave generally runs concurrently with the FMLA entitlement rather than stacking on top of it.

On the disability side, the EEOC has taken the position that modifying leave policies can be a form of reasonable accommodation for employees with disabilities.¹¹ The guidance does not specifically require access to a PTO donation bank as an accommodation, but permitting use of accrued paid leave and providing additional leave beyond standard policy are both recognized accommodations. An employer that runs a leave-sharing program and refuses to let a disabled employee participate would have a hard time defending that choice. Check that plan eligibility criteria do not inadvertently exclude conditions that qualify as disabilities under the ADA.

1
Internal Revenue Service. Notice 2006-59
2
Internal Revenue Service. Private Letter Ruling 200720017
3
Internal Revenue Service. Leave Sharing Plans Frequently Asked Questions
4
Office of the Law Revision Counsel. 26 USC 139 – Disaster Relief Payments
5
Internal Revenue Service. Notice 2001-69
6
Internal Revenue Service. Notice 2017-70
7
Internal Revenue Service. Notice 2021-42
8
Social Security Administration. 2026 Cost-of-Living Adjustment (COLA) Fact Sheet
9
Internal Revenue Service. Instructions for Form 941
10
Internal Revenue Service. 2026 Amounts Relating to Retirement Plans and IRAs, as Adjusted for Changes in Cost-of-Living
11
U.S. Equal Employment Opportunity Commission. Enforcement Guidance on Reasonable Accommodation and Undue Hardship Under the ADA