Whether it is to an active duty member or to a co-worker, in organizations that allow you to give some of your PTO (personal time off = vacation time + sick pay) to another employee, the person who utilizes the hours is the person to whom it should be taxed. The co-worker situation is becoming more common as companies are allowing the donation of PTO to employees who are going to be out an extended period of time due to medical or family reasons and does not have enough accumulated PTO to maintain employment benefit qualifications.