Leave-sharing plans: how donated PTO is taxed

The two kinds of plan in the publication

Publication 15-A (2026) describes two arrangements. The first is a leave-sharing plan that lets employees transfer leave to other employees for medical emergencies. The second is an employer-sponsored leave bank into which employees deposit leave for use by other employees who have been adversely affected by a major disaster. The tax answer has the same shape for both: the person who receives paid time off is taxed as if it were wages, and the person who donated is not taxed on the donation. The conditions are different, so keep them apart.

Medical emergency leave-sharing

For a plan that lets employees transfer leave to others for medical emergencies, the publication says the amounts paid to the recipients are considered wages. They are included in the recipients’ gross income, they are subject to social security, Medicare and FUTA taxes and to federal income tax withholding, and the employer should not include the amounts in the wages of the transferors. It also says these rules apply only to leave-sharing plans that permit employees to transfer leave to other employees for medical emergencies. So the favorable treatment of the donor is limited to plans with that purpose.

In payroll terms: the leave is paid to the recipient as ordinary wages through the normal payroll process, with withholding, matching and deposits as for any wage payment. The donor’s wages do not go up when leave is transferred, and the donor’s own wage report does not change for the donated hours.

Major disaster leave banks

The second arrangement is an employer-sponsored leave bank for use by employees adversely affected by a major disaster. The publication states that, under such programs, the IRS will not assert that a leave donor who deposits leave in the bank has income, wages, compensation or rail wages for the deposited leave if the plan treats the employer’s payments to the leave recipient as wages or compensation for purposes of FICA, FUTA, the Railroad Retirement Tax Act, the Railroad Unemployment Repayment Tax and federal income tax withholding, unless excluded by another provision of law. The publication points to Notice 2006-59 for what constitutes a major disaster and for the other rules. This is a statement of the IRS’s enforcement position, tied to the plan treating the recipient’s payments as wages.

A worked example

Maria has run out of paid leave during a medical emergency. Three coworkers donate 40 hours of leave to her under a plan that allows transfers for medical emergencies. Maria is paid $25 an hour. The leave is paid to her as wages: 40 hours times $25 is $1,000. Her employer withholds federal income tax as usual and also withholds social security of $62 (6.2% of $1,000) and Medicare of $14.50 (1.45%), and pays the employer share and FUTA as it would on any wages. The coworkers who donated the hours have nothing added to their wages for the donation. The calculator above shows this arithmetic for any hours and rate.

The rates 6.2% and 1.45% are the employee rates printed in Publication 15-A. The example is illustrative: how transferred hours are converted into pay depends on the plan, so check the plan document.

Practical points for employers

Write the plan down and limit it to its stated purpose. Only a plan for medical emergencies, or a qualifying major disaster leave bank, gets the donor treatment described above; a general plan that lets employees give time to anyone for any reason is not described in the publication. Treat the recipient’s payments as wages in every system: payroll, Form W-2, Form 941. Make sure the donated hours are removed from the donor’s leave balance without anything being added to the donor’s taxable pay. For related fringe benefit treatment, see Publication 15-B; for the withholding arithmetic on any wage payment, see our FICA tax calculator.

Limits of this page

This page summarizes one short section of Publication 15-A. It does not cover state wage payment or leave laws, the rules for particular industries such as railroads beyond the publication’s mention, or the definition of a major disaster, which the publication leaves to Notice 2006-59. A payroll professional or a CPA should review a real plan.

Sources

• IRS Publication 15-A, Employer’s Supplemental Tax Guide (2026): section 5, Wages and Other Compensation: Leave-Sharing Plans. Read November 2, 2026.
• Notice 2006-59 (Internal Revenue Bulletin 2006-28): the notice Publication 15-A cites for major disaster leave banks. Cited, not separately read.

Edition read: Publication 15-A (2026), for use in 2026. Rates, wage bases and dollar limits on this page are the 2026 figures printed in that edition; check the current publication and the IRS employment tax pages for your tax year. This page summarizes the publication and does not replace it.