Executive summary: Tax-free employee leave donations for Hawaii wildfire relief
Employees can forgo vacation, sick or personal leave in exchange for employer contributions to charitable organizations providing aid to victims of the Hawaii (HI) wildfires. Leave-based donation payments are not taxable to employees as compensation if paid before Jan. 1, 2025.
IRS issues guidance for leave-based donation programs for 2023 Hawaii wildfires
On Sept. 28, 2023, the IRS issued Notice 2023-69 (the Notice) which provides guidance on the federal income and employment tax treatment of cash payments made by employers under leave-based donation programs to aid victims of the 2023 Hawaii wildfires.
Employers may adopt leave-based donation programs which allow their employees to trade their paid leave for cash payments made by their employers to charities. Employees can elect to forgo paid vacation, sick or personal leave (but not regular pay) in exchange for their employers making cash payments for the value of that leave to charitable organizations providing aid to individuals harmed by certain disasters.
Generally, these cash payments are treated as wages or compensation to employees for federal income tax and employment tax purposes under the constructive receipt or assignment of income principles. However, in limited circumstances, the IRS will grant relief so that the amount is not taxable to the employees that forego their paid leave.
Historically, the IRS has granted relief for disasters such as major hurricanes and wildfires, the Sept. 11 terrorist attack and the COVID-19 pandemic. This new IRS Notice grants similar disaster relief.
According to the Notice, employees’ donated leave will not be treated as wages for income or payroll tax purposes if their employers’ cash payments are made to section 170(c) charitable organizations before Jan. 1, 2025, to aid victims of the 2023 Hawaii wildfires. Employers should not include these amounts in Box 1, 3 or 5 of the employees’ Form W-2.
The IRS states that these employees cannot claim a charitable contribution deduction on their individual income tax returns for the value of their forgone leave. Employers are permitted to deduct the cash payments as charitable contributions under section 170 or as business expenses under section 162 if they otherwise meet the requirements.
Leave-based donation programs are one method for providing support to disaster victims. Other types of tax-advantaged programs are available which allow employers and their employees to help individuals dealing with the effects of a disaster. For more information, see our article How employers can assist employees impacted by major disasters.
Additional information about tax relief for those affected by the wildfires in Hawaii is available on the IRS website.