Tax-free qualified disaster relief

Employers may pay or reimburse employees for necessary or reasonable expenses incurred as a result of the COVID-19 pandemic. These disaster relief payments can be made tax-free. This article will provide information on taxation, amount, use, and substantiation of these payments.

Disaster Relief Payments & Taxation

Typically, employers are taxed for all money that they give to their employees; however, the Internal Revenue Code (Section 139) specifies an exception for “qualified disaster relief payments” paid when there is a federally declared disaster.

The COVID-19 pandemic officially qualified when the President declared a “national emergency” on March 13, 2020.

Disaster relief payments made to employees are not included in gross income or wages and compensation for employment tax purposes. The employer does not report these payments on the employee’s W-2 Form and the employee does not need to report them as income.

Payment Amounts

The IRS has not specified a payment limit and the amount may vary by the employee.

Permitted Use

Disaster relief payments may be used for necessary or reasonable family, personal, funeral, or living expenses that are incurred as a result of the disaster. With the COVID-19 pandemic, this could include basics such as shelter, food, telecommuting, childcare, or medical expenses. The payments may not be used for wage replacement or expenses not incurred because of the disaster. There can also be no “double-dipping”, which means that the expenses cannot have been ones that were covered by insurance or some other means.

Documentation

Recipients are not required to substantiate the disaster relief payments as long as they are reasonably commensurate with the expenses that were incurred. It is not clear whether the IRS may, at a later date, require the recipient to prove that they did not receive the same reimbursement from another source such as an insurance company.

Employer Guidance

Disaster payments first began after 9/11. Unfortunately, there is very little guidance about disaster payments in general or about how they relate to COVID-19 specifically. Employers who plan to make disaster payments to their employees should consult a CPA, tax advisor, or a business attorney regarding IRS Code Sec. 139.

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