PTO Donation: IRS Requirements Around Leave Sharing

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.

What is PTO Donation?

PTO Donations, also referred to as "Leave Sharing", are when an employee transfers their accrued paid time off to a shared employer pool or coworker, generally due to a major medical emergency or federally declared disaster.

Can You Donate PTO to Another Employee?

The general answer is "yes", however, in order to donate PTO to another employee, a company must have some sort of formal leave-sharing or leave pool program established. 

In addition, these types of programs typically only allow PTO donation in specific circumstances, such as medical emergencies. Many programs or policies typically also require the recipient of the PTO donation to have exhausted all of their accrued leave first. 

Regardless, there are tax implications that employees and employers should be aware of regarding PTO donation.

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.

Frequently Asked Questions (FAQ)

Can employees donate their unused PTO to a coworker?

Yes, many employers choose to implement PTO donation or leave-sharing programs that allow employees to donate unused paid time off to coworkers facing serious medical emergencies or other qualifying hardships. However, participation is voluntary, and employers should establish clear policies governing how the program operates.

Is donating PTO taxable?

It depends on how the program is structured. Certain IRS-approved leave-sharing programs allow donated PTO to be transferred without creating taxable income for the donating employee. To qualify, the program must meet specific IRS requirements, such as limiting donations to employees experiencing medical emergencies or major disasters.

Why should employers have a formal PTO donation policy?

A written policy helps ensure donations are handled consistently and fairly while complying with applicable tax rules. It should clearly define who is eligible to receive donated leave, the circumstances under which donations are permitted, and how the donation process works. Clear policies also help reduce administrative confusion and compliance risks.

What situations typically qualify an employee to receive donated PTO?

PTO donation programs are generally intended for employees experiencing a qualifying medical emergency or those affected by a federally declared major disaster who have exhausted their available paid leave. Eligibility requirements should be outlined in the employer's policy.

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.