[TaxMama Summary: As long as the employer and employees follow the IRS guidelines, employees will be allowed to donate their sick pay, vacation pay or personal leave payments to the organizations helping victims of Hurricane Sandy.
Effect on Employees:
The amount donated will not be added to employees’ wages – so they will not have to pay taxes. The employee will not get a charitable contribution deduction, either – so it’s a break-even.
BONUS: Because this comes of the wages, this tax break is worth MUCH more than a contribution deduction. You save Social Security taxes, medicare taxes and the full amount of IRS and possibly state taxes, if your state agrees.
Effect on Employers: The amount donated will still be treated as wages, so the employer gets the full deduction for the compensation. It will not be treated as contributions, which might face a variety of limits, depending on the company’s business structure. ]
Treatment of Certain Amounts Paid to Section 170(c) Organizations under Certain Employer Leave-Based Donation Programs to Aid Victims of Hurricane Sandy
In view of the extreme need for charitable relief in the aftermath of Hurricane Sandy, employers may have adopted or may be considering adopting leave-based donation programs to aid victims of this hurricane. Under these programs employees elect to forgo vacation, sick, or personal leave in exchange for cash payments an employer makes to organizations described in § 170(c) of the Internal Revenue Code (§ 170(c) organizations) for the relief of victims of Hurricane Sandy. This notice provides guidance on the treatment of these payments for income and employment tax purposes.
Notice 2005-68, 2005-2 C.B. 622, provided similar guidance in view of the extreme need for charitable relief following Hurricane Katrina. See also Notice 2001-69, 2001-2 C.B. 491, as modified and superseded by Notice 2003-1, 2003-1 C.B. 257, regarding charitable relief following the September 11, 2001, terrorist attacks. This guidance is provided in view of the extraordinary damage and destruction caused by Hurricane Sandy.
The Service will not assert that cash payments an employer makes to § 170(c) organizations in exchange for vacation, sick, or personal leave that its employees elect to forgo constitute gross income or wages of the employees if the payments are: (1) made to the § 170(c) organizations for the relief of victims of Hurricane Sandy; and (2) paid to the § 170(c) organizations before January 1, 2014.
Similarly, the Service will not assert that the opportunity to make such an election results in constructive receipt of gross income or wages for employees. Electing employees may not claim a charitable contribution deduction under § 170 with respect to the value of forgone leave excluded from compensation and wages.
The Service will not assert that an employer will be only permitted to deduct these cash payments under the rules of § 170 rather than the rules of § 162. Cash payments to which this guidance applies need not be included in Box 1, 3 (if applicable), or 5 of an employee’s Form W-2, Wage and Tax Statement.