Can Employees Donate Their PTO to Each Other? What the IRS Actually Requires

Picture this: someone's out for weeks with a serious medical emergency and has used up every hour of PTO they have. A coworker says, "I've got plenty banked — just take some of mine." It's a generous instinct. It's also not as simple as it sounds — the IRS has specific rules about how PTO can move from one employee to another, and skipping them can leave both people with a tax bill they didn't expect.

The default rule: you're taxed on what you earn, even if you give it away

Under general tax principles, the person who earns paid time off is the one responsible for the taxes on it — whether they use it themselves or hand it to someone else. Without a qualifying program in place, a PTO donation can end up taxed to both the donor (as if they'd used it themselves) and the recipient (as ordinary wages when they use it).

The two arrangements the IRS recognizes

To avoid that outcome, the IRS carved out two specific structures where donated leave is only taxed to the person who receives it:

• Medical emergency leave-sharing plans — for an employee (or their family member) facing a medical condition serious enough to require a prolonged absence and a real loss of income, after the employee has used up all their own paid leave.
• Major disaster leave-sharing plans — for employees affected by a disaster the President has formally declared, where leave goes into a shared pool rather than to one named person.

Both routes require a written plan that the employer actually administers — an informal "just use my hours" arrangement between two coworkers doesn't qualify for either exception.

What makes a plan actually qualify

• Donated leave has to be taken as time off — cashing it out defeats the exception entirely.
• Under a disaster plan, donors deposit into a shared pool and can't direct it to a specific person; any leave left unused has to be returned proportionally to the donors.
• There are limits on how much an employee can donate in a year, and donors can't claim a deduction or charitable contribution for the leave they give up.
• The recipient pays ordinary income and payroll taxes on the leave when they use it — same as any other paycheck.

Where to check the specifics

• IRS — Leave Sharing Plans Frequently Asked Questions
• IRS Notice 2006-59 — Major Disaster Leave-Sharing Plans
• U.S. Department of Labor — Vacation Leave (FLSA baseline)

Before you offer leave-sharing, check these boxes

• Decide which plan type fits your situation — medical emergency, major disaster, or both — and put it in writing.
• Spell out eligibility rules: how much leave an employee needs to exhaust first, what counts as a qualifying medical condition or declared disaster, and any annual donation caps.
• For disaster plans, structure it as a shared pool, not a direct transfer, and build in the rule that unused leave returns to donors proportionally.
• Confirm the plan requires leave to be taken as time off, not cashed out.
• Set up payroll coding so donated leave is taxed to the recipient, not the donor, when it's used.
• Have the plan reviewed before rolling it out — a leave-sharing program that isn't built to IRS specifications can trigger the exact tax exposure it's meant to avoid.

The bottom line

A PTO donation program is a genuinely nice thing to offer employees — but the difference between "nice idea" and "unexpected tax bill" comes down to whether the plan is actually built the way the IRS requires. Designing and administering the plan itself is a legal and policy decision that belongs with your organization and counsel. Where PayNW comes in is on the execution side: once your plan is defined, we help make sure donated leave is coded and taxed correctly in payroll, every time it's used. If you're weighing whether a leave-sharing program makes sense for your team, let's talk about how the payroll side would work.