Is Shared Leave Tax Deductible?

How Shared Leave Works

Some employers implement shared leave, donated leave, leave-sharing, voluntary shared leave policies or programs for their employees. The shared leave programs allow an employee to donate the hours accrued for vacation, personal or sick leave to benefit coworkers who are in need of additional hours. Shared leave recipients and donors must meet certain requirements set by the employer and follow the proper procedures. Generally, employers limit the amount of shared leave hours an worker can receive during their employment.

A person who chooses to donate his extra paid hours may be unaware of the tax consequences the good deed may bring. The employee donating the hours is required to pay the taxes. Unearned compensation through vacation hours or sick leave is taxed the same as earned wages. The employee receiving the paid hours from shared leave is not responsible for paying taxes on these earnings.

In the event of a medical emergency, the IRS offers exceptions for employer-sponsored, shared leave programs. The IRS defines a medical emergency as a medical condition of the employee or immediate family member requiring prolonged absence resulting in a substantial loss of income once the employee has exhausted all paid leave. The donated leave is considered wages for the receiving employee. The employee receiving the donated hours is responsible for the taxes instead of the donor. Although the donor is not required to pay taxes on her donated leave, the shared leave cannot be claimed an expense, charitable contribution or loss deduction.

Employees who choose to donate to the designated major disaster shared leave fund can avoid the tax burden. Employees who experience a hardship resulting from a major disaster may draw from the shared leave program. Tax liability shifts from the donor to the accepting employee in this case. A major disaster must be declared by the U.S. president and must warrant individual and/or public assistance from the federal government. If leave is not used by the end of the specified disaster period, it must be returned to the donors. Just as with a medical emergency, the donating employee cannot claim the donation as an expense, charitable contribution or loss deduction.