Tax Implications for Donated Sick Leave

The 84th Legislature enacted House Bill 1771, which added Government Code Section 661.207, to provide state employees with severe illness or who have family members with severe illness access to sick leave in excess of what is available through the state employee sick leave pool.

The stated intent of HB 1771 is to provide a means for employees to donate sick leave to an employee in the same agency when that employee or an immediate family member of the employee has a severe illness that exhausts all their sick leave, including that available through the sick leave pool. The Comptroller’s office has been asked if this recently enacted provision creates tax consequences for the donor or the recipient.

Internal Revenue Service (IRS) Revenue Ruling 90-29 provides information on this topic. Additional research indicates that Government Code Section 661.207 is consistent with the medical emergency leave sharing plan exception the IRS provides to the general assignment of income rule. The exception holds that donation of sick leave is taxable to the recipient when the sick leave is used.

With this view, the taxable wages of the recipient and the donor are currently being correctly reported on IRS Form W-2, as generated from USPS or CAPPS HR/Payroll. Your agency may want to review whether your agency’s administration of Government Code Section 661.207 is consistent with the stated intent and, if not, determine any tax consequences to your employees. The Comptroller’s office cannot provide legal guidance or determine compliance with either the legislative intent or the IRS guidelines.

See Donation of Sick Leave PDF on the State Auditor’s Office website for additional information.

For information about tax implications of the family leave pool established by Texas Government Code, Chapter 661, Subchapter A-1, see Tax Implications of the Family Leave Pool (FPP A.049).

If you have further questions, please contact Stacey Minces at (512) 475-5615 or stacey.minces@cpa.texas.gov.