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COVID-19 expenses eligible for tax free qualified disaster assistance from employers

Now that COVID-19 has been declared a national emergency, Internal Revenue Code Section 139 allows employers to make tax-free payments in assistance or reimbursements to employees as “qualified disaster payments.” This is how it works.

Qualified disaster payments are payments that wouldn’t normally be reimbursed by insurance to help an employee with expenses related to a qualified disaster and the repair of home or contents destroyed in a qualified disaster. The payments don’t include non-essential, luxury, or decorative items or services. Wage replacement (paid sick or other leave) is not covered by Section 139, so such payments would still be taxable and subject to withholding and reporting.

Employers can pay for, reimburse, or provide in-kind benefits reasonably believed by the employer to result from the COVID-19 national emergency that are not covered by insurance.

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Qualified disaster payments are federal tax-free to employees and fully deductible to the employer but are not considered gifts, aren’t reported on Form W-2 or 1099 and not subject to federal income or payroll tax withholding. Check with your state to see how they handle disaster payments. Section 139 does not have a cap on how much an employer can give an employee.

While the IRS does not require employees have a plan for what disaster related expenses, they’ll help employees with, one is recommended. The IRS also doesn’t require receipts or proof of need but employers are encouraged to have a plan for how to deal with that.

For more information and resources on COVID-19, see our coronavirus page. Feel free to contact your Henry+Horne tax adviser with any questions on qualified disaster assistance, or just tax questions in general.

Beth Hawley