The IRS extended special tax relief for COVID-19 leave-based donation programs. An employer with a leave-based donation program allows its employees to give up their vacation, sick or personal leave in exchange for the employer paying cash to a charitable organization.
Without the tax relieve, the amount of donated leave would be included in the donating employee’s income. This deters participation because the employee would be taxed on money the employee did not actually receive.
IRS Notice 2020-46 provided relief from the unintended federal income and employment tax consequences for donations made before January 1, 2021. New IRS Notice 2021-42 extends the relief for donations made through the end of 2021. PTO relinquished by an employee in exchange for the employer making a cash payment to a tax exempt organization does not constitute income to the employee if the payments are made for the relief of victims of the COVID-19 pandemic.
Employers who have these programs can continue the favorable tax treatment through 2021.
