Employers Can Make Tax-Free Relief Payments to Employees During COVID-19 Pandemic

BOSTON — President Trump’s designation of the COVID-19 pandemic as a national emergency has triggered Section 139 of the Internal Revenue Code, a post-9/11 provision that allow employers to make tax-favored “qualified disaster payments” to employees.

Qualified disaster payments are fully tax-deductible to the employer and tax-free to the employee for federal income tax and employment tax purposes and are not reported on IRS Form W-2 or 1099. States generally conform to this federal tax treatment, but employers should confirm on a state-by-state basis whether income tax withholding and/or unemployment insurance tax contribution obligations apply to such payments.

Qualified disaster payments include payments made by an employer to an employee to reimburse or pay the employee for “reasonable and necessary personal, family, living, or funeral expenses” incurred due to the disaster, but only if such expenses are not covered by insurance. In the case of the COVID-19 pandemic, qualifying expenses might include unreimbursed medical expenses related to COVID-19 care, increased telecommuting expenses, and childcare or tutoring due to school closings. Importantly, wage replacement payments and severance payments are not eligible for tax benefits under Section 139.

Employers can immediately begin making qualified disaster payments. Although employers are not required to have a written plan in place, nor are employees required to substantiate their expenses, we nevertheless recommend having a written plan that describes, at a minimum, who is eligible, what expenses will be covered, the maximum amount of benefits available, and how and when payments will be made.

As always, this summary is for informational purposes only and is not tax or legal advice. Always consult a professional tax advisor for advice in light of the taxpayer’s particular circumstances.

For more information on the tax treatment of relief payments to employees, please contact:

Christopher Bird
(617) 918-7086
CBird@BlaisTaxLaw.com

Travis Blais
(617) 918-7081
TBlais@BlaisTaxLaw.com