You can transfer PTO to another employee only when your employer runs a formal leave-sharing program that allows it. No federal law requires employers to offer one, and no federal law forbids it. The tax consequences hinge on whether that program fits one of two narrow IRS exceptions: if it does, the donor owes no tax on the gifted hours and the recipient is taxed when they use the leave; if it does not, the donor still owes income tax on the hours they gave away.
Whether Your Employer Can Allow It
The Fair Labor Standards Act sets wage and overtime rules but does not require paid time off, and it does not address transfers between employees.1eCFR. 29 CFR Part 553 – Application of the Fair Labor Standards Act to Employees of State and Local Governments Leave sharing is entirely at the employer’s discretion. A company can create a program, change it, or scrap it, subject only to promises already made in contracts or handbooks.
State law can constrain how a program is built. California, Colorado, and Montana treat accrued vacation as earned wages that cannot be forfeited, so transferring accrued hours to a coworker can look like forfeiture from the donor’s side. Most states defer to the employer’s written policy, but a company operating across state lines has to check each jurisdiction before setting up a program.
If your employer offers nothing formal and a manager is willing to quietly shift hours between timesheets, that is where the tax trap sits. Skip to the next section before you agree to it.
The Default Tax Rule: Donor Still Pays
The IRS starts from a harsh baseline. If you earned the PTO, it is your income even if you give it away. Two doctrines drive this. Assignment of income says you cannot avoid tax by directing your compensation to someone else. Constructive receipt says that if you had the right to take those hours as paid time, you have effectively received the income whether you used them or not.2Internal Revenue Service. Notice 2001-69 Treatment of Certain Amounts Paid to Section 170(c) Organizations under Employer Leave-Based Donation Programs
Under this default, a donor who transfers 80 hours of PTO owes income tax on the value of those hours at their normal rate, which for federal purposes runs anywhere from 10% to 37% depending on income.3Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 The employer still has withholding and reporting obligations on those hours, and the recipient can be taxed too when they use the leave. An informal transfer between coworkers, without a qualifying written plan, produces this outcome.
Two exceptions flip the tax entirely to the recipient. Both require a formal, employer-sponsored plan in writing.
Medical Emergency Plans
Under Revenue Ruling 90-29, when an employer maintains a bona fide leave-sharing plan for medical emergencies, the donor realizes no income and cannot claim a deduction. The recipient is taxed on the donated leave as regular wages when used, with normal withholding for income tax, Social Security, and Medicare.4Internal Revenue Service. Internal Revenue Service Number 200720017
To qualify, the plan must define a medical emergency as a condition affecting 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 all other available paid leave. A week home with a broken ankle likely will not qualify. A cancer diagnosis requiring months of treatment almost certainly will. The absence has to be long enough to drain the employee’s own leave balance and threaten real financial hardship.
Major Disaster Plans
IRS Notice 2006-59 created a parallel exception for employees affected by a presidentially declared major disaster under the Stafford Act. Again the donor is not taxed, and the recipient is taxed on the leave as wages when used.5Internal Revenue Service. Leave Sharing Plans Frequently Asked Questions
The rules are tighter than the medical version. The plan must be in writing. Donated hours must route into an employer-sponsored leave bank rather than to a named individual. Donors generally cannot contribute more leave than they would normally accrue in a year. Recipients must use the leave for disaster-related purposes, the plan must set a reasonable deadline for both donations and usage based on the severity of the event, and recipients cannot convert donated leave into cash.6Internal Revenue Service. IRS Notice 2006-59 Major Disaster Leave-Sharing Plans
Donor Limits and Recipient Prerequisites
Employers set their own criteria, but the guardrails are consistent across most programs.
Donors are almost always required to keep a minimum leave balance after donating, typically five to ten days, so they are not left empty-handed for their own needs.7U.S. Office of Personnel Management. Fact Sheet – Voluntary Leave Transfer Program The federal Voluntary Leave Transfer Program, which many private employers use as a template, caps annual donations at half the leave an employee would normally accrue in a year. The IRS major disaster exception caps donations at roughly one year’s accrual.6Internal Revenue Service. IRS Notice 2006-59 Major Disaster Leave-Sharing Plans
Recipients generally have to burn through their own accrued leave before drawing from the donated pool. The federal program uses a threshold of at least 24 work hours of absence without available paid leave for a full-time employee.7U.S. Office of Personnel Management. Fact Sheet – Voluntary Leave Transfer Program Private employers set their own thresholds, but the “use your own first” rule is nearly universal.
What Happens to Unused Donated Hours
Donated leave that the recipient never uses is not theirs to keep. Under the federal program, any leftover hours must be restored to the donors’ accounts when the medical emergency ends or the recipient leaves the organization. Donated annual leave cannot be included in a lump-sum payout at separation, and it cannot be recredited to a former employee who later returns.7U.S. Office of Personnel Management. Fact Sheet – Voluntary Leave Transfer Program
Private employers are not bound by those specific rules, but well-designed programs follow the same principle. A policy that lets unused donated hours convert to cash for the recipient, or pays them out at termination, risks losing the IRS exception, which specifically prohibits cash conversion of donated leave.
Donating PTO to Charity Instead
Some employers run a different kind of program: instead of routing hours to a coworker, the employer converts donated PTO into a cash payment to a qualifying charity. The IRS has issued targeted guidance letting these programs run tax-free for donors in specific disaster contexts, including major hurricanes, wildfires, and the COVID-19 pandemic. Under those notices, the cash payments are excluded from the donor’s gross income and wages and do not appear on the W-2. The tradeoff is that the donor cannot also claim a charitable contribution deduction for the same leave value.8Internal Revenue Service. IRS Notice 2017-70 Leave-Based Donation Programs
These notices carry expiration dates tied to the specific disaster. The COVID-19 version expired for payments made after December 31, 2021.9Internal Revenue Service. IRS Notice 2021-42 Extension of Leave-Based Donation Programs Outside an active IRS notice, donating PTO to charity through your employer falls back on the default constructive receipt rules, meaning you owe tax on the leave value even though you never received the money.
How the Transfer Actually Happens
The mechanics vary by employer, but the sequence is usually the same. The employee facing a medical emergency or disaster submits a written request to HR with medical certification or disaster documentation and confirmation that they have exhausted their own leave. HR verifies the qualifying event and determines how many donated hours the recipient can receive. Eligible coworkers then submit donation forms specifying the hours they want to transfer, either into a general leave bank or, in some programs, directed to a named recipient. Payroll subtracts the hours from each donor’s balance and adds them to the recipient’s. The recipient is paid at their own regular rate when they use the leave, and the employer withholds taxes as it would on any paycheck. The employer keeps records for tax reporting and restores unused hours to donors when the event ends.
Get written confirmation of the transfer once it is complete. If the IRS ever questions whether the plan meets the requirements for tax-free donor treatment, that paper trail is what protects you.