Under Section 139 of the IRS Code, the federal government’s declaration of a national emergency allows employers to provide tax-free payments or reimbursements to affected employees as “Disaster Relief Payments.” Since the COVID-19 pandemic was declared a national emergency in March of this year, employers can take advantage of this program to provide financial assistance to employees to help with the cost of necessary personal, family, living, or funeral expenses incurred as a result of the qualified disaster.
Payments under this program cannot be for wage replacement. The payments are tax-free to employees and are typically fully deductible to the employer from a federal tax standpoint. States generally follow federal tax treatment for qualified payments, however, these payments may still be considered “wages” by some states for purposes of state unemployment insurance tax. Employers should consult with their tax advisor on their specific state and local tax laws.
For COVID-19, employers may provide payments to employees for things like:
- Child care or tutoring due to school closings.
- Work-from-home expenses such as costs for establishing a home office, increased utility costs or increased internet costs.
- Increased commuting costs, such as taking a taxi due to lack of public mass transit.
- Unreimbursed health-related expenses.
- Over the counter medications and home disinfectant supplies.
There is no limit on the dollar amount employers can provide. Employers may choose whether payments made under this program are a flat amount or a variable amount per employee, however, payments should not be a higher amount for highly compensated employees than for non-highly compensated employees. Payments can be provided to employees through a payroll system but should not be coded as wages.
What Employers Should Do Next
While not required, employers are strongly encouraged to have a formal program guided by a written policy and applied consistently. Interested employers should consult with their CPA or tax advisor for assistance in setting up a disaster relief payment program.