On June 11, 2020 the IRS issued Notice 2020-46 (the Notice) which provides guidance to employers whose employees choose to forgo sick, vacation or personal leave because of the COVID-19 pandemic.
Leave-based donation programs allow employees to elect to forgo certain paid leave in exchange for the employer then making cash payments for the value of that leave to charitable organizations that provide aid to individuals harmed by a certain disaster. Generally, these cash payments are treated as wages or compensation to employees for federal income tax and employment tax purposes under the constructive receipt or assignment of income principles. In limited circumstances, the IRS will grant relief that provides the amount is not taxable to the employees that forego their paid leave.
Historically, the IRS has granted this relief for disasters such as major hurricanes and the September 11 terrorist attack. The IRS had yet to release guidance on this issue for the COVID-19 pandemic, though, so it was unknown whether this disaster would receive the same treatment for such payments made to charities. Finally, the Notice was released offering essentially the same relief available in prior disasters with such IRS notices.
In general, the employee’s donated time does not need to be treated as wages for income or payroll tax purposes if it meets the following criteria: (1) the payment is made to a section 170(c) organization for the relief of victims of the COVID-19 pandemic in the affected geographic areas; and (2) the payment is paid to the section 170(c) organization before Jan. 1, 2021.
The employees who forgo leave may not then claim a charitable contribution deduction on their individual tax returns. Employers are permitted to deduct the cash payments under the rules of section 170 or section 162 if the employer otherwise meets the respective requirements.
For other employer assistance mechanisms, see our article here.