On March 13, 2020, President Trump declared a national emergency under the Robert T. Stafford Disaster Relief and Emergency Assistance Act (the “Act”) due to the global coronavirus pandemic. As a result of this action, a new option is available for employers to provide tax-favored financial assistance to employees who are directly or indirectly affected by coronavirus.
CSH has met (virtually, via Skype or Zoom) with hundreds of businesses over the past several weeks. We continue to see expanded mandatory business closures, reduced hours, working from home and major slowdowns in business activity. Employers are contemplating what options may be available to aid employees. Let’s look at several available tax-favored employer-provided assistance options.
As a result of declaration under the Act, employers are permitted to offer additional assistance to affected employees. Under Section 139 of the IRC, “qualified disaster relief payments” are not treated as taxable wages/income to employees and are fully deductible to the employer as salary expense.
Qualified disaster payments are payments that are not otherwise reimbursed by insurance made by an employer to an employee that are reasonably expected by the employer to:
- Reimburse or pay reasonable and necessary personal, family, living or funeral expenses incurred as a result of a qualified disaster; and
- Reimburse or pay reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence or repair or replacement of its contents to the extent that the need for such repair, rehabilitation or replacement is attributable to a qualified disaster.
- The payments should not include non-essential, luxury or decorative items or services.
Under IRC Section 139, employers may provide direct financial assistance to employees as a result of a qualified disaster. The assistance provided will not be treated as income/wages to the employees, and the employer will be able to deduct those payments as ordinary and necessary business expenses. There is no specific cap on the amount of assistance that may be provided to an employee under Section 139 other than it must be “reasonable and necessary” and must not be for an expense reimbursable by the employee’s insurance. Wage replacement (such as paid sick or other leave) would not be covered by Section 139, so such payments would still be taxable wages and would remain subject to income and payroll tax withholding and reporting.
Specific to the circumstances related to coronavirus, employers can pay for, reimburse or provide in-kind benefits for expenses reasonably believed by the employer to result from the coronavirus that are not covered by insurance. For example, employers could pay for, reimburse or provide employees with tax-free payments for: over-the-counter medications, hand sanitizers, home disinfectant supplies, child care or tutoring due to school closings, work-from-home expenses (setting up a home office, internet costs, printer, cell phone, etc.), increased costs from unreimbursed health-related expenses and increased transportation costs due to work relocation (such as using taxi or ride-share services from home instead of public mass transit).
Qualified disaster payments are federal-tax-free to employees and are fully deductible to the employer. Such payments are not considered gifts. There is no federal reporting or disclosure, so such payments are not reported on Form W-2 or 1099 and are not subject to federal income or payroll tax withholding.
Visit our Coronavirus Resource Center for more information.