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Employees typically can't donate their time directly by reducing the
amount of vacation owed to them. The concept is similar to someone
donating their time such as a consultant, in which case they normally have
to be paid a fee for their services and then donate the money back to the
Someone giving vacation time will have to take something into income. You'll have to pay them an additional amount and reduce their vacation accordingly. This will typically increase their overall tax liability since the credit for the donation will be less than the increase in taxes caused by taking the gross amount into income.
Seek advice from your legal counsel on these schemes as they vary by tax jurisdiction.
You should also consider the employee productivity aspects of donating vacation time. Vacations are part of the benefits given to employees in order to benefit their health and welfare. If someone is not taking their vacation you should determine why, and if necessary have a conversation with them or their supervisor in order to help get the amount of banked vacation down to a reasonable level.