The IRS has released guidance for employers who have established programs that allow employees to donate the value of their vacation, sick, or personal leave to be paid by the employer to a §170(c) organization providing COVID-19 relief in Notice 2020-46.[1]

The Notice describes the programs as follows:

Under leave-based donation programs, employees can elect to forgo vacation, sick, or personal leave in exchange for cash payments that the employer makes to charitable organizations described in section 170(c) of the Code (section 170(c) organizations).

The Notice provides the following tax treatment for employees for these payments.

Cash payments an employer makes to section 170(c) organizations in exchange for vacation, sick, or personal leave that its employees elect to forgo will not be treated as wages (or compensation, as applicable) to the employees or otherwise be included in the gross income of the employees if the payments are: (1) made to the section 170(c) organizations for the relief of victims of the COVID-19 pandemic in the affected geographic areas; and (2) paid to the section 170(c) organizations before January 1, 2021. Similarly, employees electing to forgo leave will not be treated as having constructively received gross income or wages (or compensation, as applicable). The amount of cash payments to which this guidance applies should not be included in Box 1, 3 (if applicable), or 5 of the Form W-2. Electing employees may not claim a charitable contribution deduction under section 170 with respect to the value of forgone leave.

Similarly, the Notice provides the following treatment for the employer.

An employer may deduct these cash payments under the rules of section 170 or the rules of section 162 if the employer otherwise meets the respective requirements of either section.

[1] Notice 2020-46, June 11, 2020, https://www.irs.gov/pub/irs-drop/n-20-46.pdf (retrieved June 11, 2020)