In most private-sector jobs, you can transfer PTO to another employee only if your employer has set up a leave-sharing program that allows it. No federal law forces employers to offer one, and no federal law forces them to accept a donation you propose on your own. When a program does exist, two IRS provisions decide whether you owe tax on the hours you give away: Revenue Ruling 90-29 covers medical emergencies, and Notice 2006-59 covers presidentially declared disasters. Outside those two lanes, the donor generally still pays tax on donated hours.
Whether Your Employer Has to Allow It
The Fair Labor Standards Act does not require employers to provide vacation, sick leave, or any paid time off, so it certainly does not require them to let you hand your hours to a coworker.1United States Department of Labor. Vacation Leave Whether a donation is possible comes down to your company’s written policy, your employment contract, or a collective bargaining agreement.
Federal employees have a formal framework, the Voluntary Leave Transfer Program, that lets them donate annual leave to coworkers facing medical emergencies.2U.S. Office of Personnel Management. Fact Sheet: Voluntary Leave Transfer Program Private employers have no equivalent obligation. Many still create leave-sharing programs voluntarily, but if yours has none in writing, you generally cannot force the company to move hours from your balance to someone else’s.
One wrinkle at the state level: in some states, accrued vacation is treated as earned wages that vest as you work, which can add accounting steps to a donation because you are giving up a financial asset. If your employer’s policy is silent, check your state labor department’s guidance before assuming a transfer is allowed.
The Two IRS Exceptions That Keep You From Being Taxed
The default tax rule is unforgiving. If you earn income, you owe tax on it even if you direct the payment to someone else. The IRS calls this the assignment-of-income doctrine.3Internal Revenue Service. Notice 2001-69 Applied to PTO, that means donating hours would normally leave you owing tax on wages you never actually received. The IRS has carved out two exceptions that move the tax to the recipient and off the donor.
Medical Emergency Plans (Revenue Ruling 90-29)
Revenue Ruling 90-29 lets employers set up leave-sharing arrangements where donors give hours to coworkers facing a medical emergency without being taxed on the transfer. To qualify, the plan must define a medical emergency as a medical condition of the employee or a family member that requires a prolonged absence from work and will cause a substantial loss of income because the employee has exhausted other paid leave.4Internal Revenue Service. Private Letter Ruling 200720017 The plan must be in writing and administered by the employer.
When those conditions are met, the donor owes no income tax on the donated hours. The recipient pays income tax at the recipient’s own rate when the hours are used, and the employer withholds Social Security, Medicare, and federal income tax as it would on any other wages.
Major Disaster Plans (Notice 2006-59)
IRS Notice 2006-59 creates a parallel framework for leave-sharing tied to a major disaster declared by the President under the Stafford Act.5Internal Revenue Service. Notice 2006-59 – Major Disaster Leave-Sharing Plans Under a qualifying plan, donors deposit accrued leave into an employer-sponsored bank rather than sending it to a named coworker, and employees affected by the disaster draw from that pool. The IRS has confirmed that donors under a qualifying plan do not include the deposited leave in their income or wages.6Internal Revenue Service. Leave Sharing Plans Frequently Asked Questions
To qualify, the plan must meet several requirements:5Internal Revenue Service. Notice 2006-59 – Major Disaster Leave-Sharing Plans
- It must be in writing and administered by the employer.
- Donors deposit leave into a general bank, not to a named recipient.
- A donor generally cannot give more leave in a year than they would normally accrue.
- Recipients must use the leave for purposes related to the declared disaster.
- The plan must set a reasonable window for depositing and using leave after the disaster.
- Recipients cannot convert donated leave into cash.
- Any donated leave not used by the end of the plan period must be returned proportionally to donors.
What Happens If the Transfer Doesn’t Fit Either Exception
If a donation falls outside a qualifying medical emergency plan or major disaster plan, the assignment-of-income doctrine applies in full. The donor is taxed on the value of the donated hours as though they had received the wages, and the recipient may also be taxed when the leave is used. That double hit is why most employer programs are deliberately structured to fit one of the two IRS exceptions.
Selling or privately trading PTO to a coworker sits squarely outside both exceptions. The donor would owe income tax on the wages the leave represents, and cash changing hands can raise additional gift tax questions, since a transfer of value where the donor receives nothing in return generally counts as a gift under IRS rules.7Internal Revenue Service. Frequently Asked Questions on Gift Taxes Employer-run PTO buy-back or cash-out programs are a separate arrangement between you and the company, not a private transfer, and follow their own rules.
How to Actually Donate Hours
Programs vary, but most share the same shape. The recipient usually has to exhaust their own sick, vacation, and personal leave before becoming eligible. Donors typically face a cap so they don’t drain themselves. Federal employees under the Voluntary Leave Transfer Program, for example, cannot donate more than half of the annual leave they would accrue in the leave year.8eCFR. 5 CFR Part 630 Subpart I – Voluntary Leave Transfer Program Private employers set their own limits.
The paperwork usually goes through HR or payroll. Expect to provide your employee ID, the recipient’s name and department, the number of hours you want to donate, and the type of leave. Some employers convert hours to a dollar value based on the donor’s salary; others transfer hours at face value regardless of pay differences.
After you submit the request, the employer confirms you have the hours to give, that the recipient qualifies, and that the transfer complies with policy. Federal agencies must act on a recipient’s application within 10 calendar days, excluding weekends and holidays.2U.S. Office of Personnel Management. Fact Sheet: Voluntary Leave Transfer Program Private timelines vary, though a review of a few business days is common. Check your next pay statement to confirm the balances updated correctly on both ends.
How Donated Leave Interacts With FMLA and Overtime
Donated leave provides pay during an FMLA absence; it does not stretch the absence. FMLA gives eligible employees 12 workweeks of leave in a 12-month period, and donated hours substitute for what would otherwise be unpaid FMLA time.9U.S. Office of Personnel Management. Family and Medical Leave Act (FMLA) 12-Week Entitlement Once those 12 weeks run out, job protection ends no matter how many donated hours are still sitting in the account.
Donated leave also doesn’t count toward the 40-hour overtime threshold. The FLSA bases overtime on hours actually worked, and payments for time not worked, including vacation, holidays, and donated leave, are excluded from the regular rate.10eCFR. 29 CFR Part 778 – Overtime Compensation Use 24 hours of donated leave and work 20 hours in the same week and the employer owes overtime on none of it.
What Happens to Unused Donated Hours
Under major disaster plans that meet Notice 2006-59, unused donated leave must be returned proportionally to the donors who contributed it.5Internal Revenue Service. Notice 2006-59 – Major Disaster Leave-Sharing Plans Federal employee medical-emergency programs follow a similar rule: when the emergency ends, remaining donated annual leave is returned to donors in proportion to what they gave.11eCFR. 5 CFR 630.1117 – Procedures for Returning Unused Donated Annual Leave
Private employers are not bound by the federal rules and their approaches vary. Some return unused hours; others treat the donation as final once processed. Ask your HR department before you donate. If the plan is structured to qualify under one of the IRS exceptions, a return-of-unused-leave mechanism is usually built into it, and if the plan lacks one, that is a signal it may not qualify for the favorable tax treatment in the first place.