Small Business Office

Employers Can Make Tax-Free Payments to Employees to Cover Certain Costs

The toll on the economy caused by the novel coronavirus (COVID-19) has left businesses looking for ways to assist their employees through their financial struggles. The seldom used Internal Revenue Code Section 139 gives employers an opportunity to make tax-free payments to their employees, “qualified disaster relief payments,” to reimburse certain costs incurred as a result of COVID-19. Let’s look at how this works.

Qualified Disaster Relief Payments
IRC §139 provides an exclusion from gross income for amounts received by taxpayers that are “qualified disaster relief payments.” In addition to these not being included in taxable income for the employees receiving such payments, these qualifying payments are deductible for the employer making such payments. To qualify, the payment must reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster. Payments can also be made to 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.

Payment of employee wages, even if voluntary, does not count and will continue to be taxable. However, the provision will allow for tax-free reimbursement of specific employee expenses caused by COVID-19. For instance, employers can pay for or reimburse employee expenses that are not covered by insurance such as over the counter medications, disinfectant and other cleaning supplies, expenses relating to childcare due to school closures, funeral costs, and various work-from-home expenses. There is no cap or limitation on the amount or frequency that these qualified disaster payments can be made, and payments can be made to all employees or to an individual employee.

Unlike other reimbursement plans there does not need to be a formalized, written plan in place for an employer to take advantage of §139. Although, having a written plan is always recommended so that employees understand the guidelines that their expenses must fall within to qualify, and who is eligible for such payments. There is no requirement that employees provided relief under §139 maintain a certain title or minimum days of employment before being eligible. Should an employer wish to provide their employees §139 relief all employees would be eligible.

Application to the Coronavirus Pandemic
COVID-19 was declared an emergency under the Stafford Act on March 13, 2020 and although there is legal debate over the terminology used, the consensus is that due to this declaration §139 relief is permitted as COVID-19 is an emergency and federally declared disaster. IRC §139 has not been utilized due to a pandemic before and so while this is unprecedented it is reasonable that given the declaration COVID-19 falls within the scope of §139. The ability to utilize §139 is likely not one that employers have come across or taken advantage of in the past, and if you believe that your employees would benefit from providing them qualified disaster relief payments please reach out to your HBK Tax Advisor.

About the Author(s)

Ben DiGirolamo, CPA, JD

Ben DiGirolamo, CPA, JD is a Principal in the Tax Advisory Group (TAG) of HBK and works in the Youngstown, OH office. He has been with the firm since 2009 and has focused extensively on entity tax issues, entity planning, and flow-through taxation. Additionally, he has experience with many of our real estate and manufacturing clients. As a member of TAG, Ben frequently teaches tax-related training courses both internally for the firm and externally for clients and the public. Ben provides research and expert counsel on complex tax issues for our clients. He also regularly appeared on the mid-day news broadcast of Youngstown, Ohio's NBC affiliate station in a segment called “Smart Money,” which highlights personal financial planning tips.

Cassandra Baubie

Cassandra Baubie is an Associate at HBK CPAs & Consultants and is a member of its Tax Advisory Group (TAG). Cassandra joined HBK in 2017. She works in the firm’s Youngstown, Ohio office. She has experience in tax law research and writing. Cassandra focuses on issues pertaining to State and Local Taxation (SALT), as well as flow through entity taxation.

Hill, Barth & King LLC has prepared this material for informational purposes only. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.