By Mark Hodges, CPA, Tax Senior Associate | Family, Executive & Entrepreneur Advisory Services Team
IRS Establishes Rules for Employer Leave-Based Donation Programs
What a start to 2020. The implications of COVID-19 continue to ripple throughout our communities and workplaces. With the varying impacts from COVID-19, employees may find that their accrued leave balances are more than they plan to use by the end of the year. Regardless of how your employees may have accrued more leave than they are able to utilize, the IRS has established rules to allow employers to set up leave-based donation programs. These leave-sharing programs provide a great deal of flexibility by allowing employees to forgo vacation, sick, or personal leave in exchange for cash payments made by an employer to a qualifying charitable organization that will benefit COVID-19 victims.
This program is a win-win for all sides as the leave-based donation programs allow employees to direct their vacation, sick, or personal leave to charitable organizations and such charitable organizations are not taxed on the associated income so long as:
- The payments are made to qualifying charitable organizations for the relief of victims of COVID-19 (defined under IRC section 170(c)), and
- The payments are made to the qualifying charitable organizations before January 1, 2021.
Although the employee is permitted to direct such payments to specific organizations, the IRS has indicated that this ability to direct funds does not result in the constructive receipt of gross income by the employee/donee. Employers will exclude such payments from the employees Form W-2 (Box 1, 3, and 5). As there is no income reported by the employee, the employee is not allowed to claim a charitable deduction for contributed leave.
For employers wishing to establish a leave-sharing program, cash contributions made to qualifying charities may be deductible by the employer as a charitable contribution or a business expense if the employer would otherwise meet requirements for claiming these deductions. Employers will exclude such payments from the employees Form W-2 (Box 1, 3 and 5).
One last benefit to all parties (the employee, the employer and the charitable organization) – increased donation due to the elimination of FICA and Medicare taxes on such payments. Had the employee received the income as wages, it would have been net of FICA and Medicare tax as the charitable donation does not eliminate such taxes. The employer would have had a corresponding tax liability for its share of FICA and Medicare. As such taxes are not withheld, increased funds are now contributed to the charity. Everyone wins!
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.