As summer arrives and many employees return to their regular workplaces, it can be easy to ignore the large number of employees who will not be able to return to work full time, due to social distancing or other issues related to COVID-19. restrictions. For many of these employees, Section 139 of the Internal Revenue Code can be an important lifeline, as Section 139 of the Code allows employers to reimburse certain employee living expenses without triggering federal tax on them. Income.
Prior to the September 11, 2001 attacks, employers were more limited in their ability to provide emergency relief payments to their employees. Payments made by employers directly to their employees were generally fully taxable for employees, and employers were generally required to pay the employer’s share of FICA taxes, in addition to taxes withheld from employees. The tax liability of these payments reduced the amount that employees could ultimately use to pay for living expenses. While 501 (c) (3) charities could make tax-free grants to individuals and employers could donate funds to such charities, there were significant restrictions on the category of charities. people that these organizations could benefit from. In particular, charities generally had to select beneficiaries based on their financial need, not their employer.
The attacks of September 11, 2001 created a great need to put funds in the hands of the victims of the attacks, and the obstacles to relief payments became more important. Congress responded by enacting section 139 of the Code, as part of the 2001 Victims of Terrorism Tax Relief Act.
Section 139 (a) of the Code provides that gross income does not include any amount received by a person as an âeligible disaster relief paymentâ. An eligible disaster relief payment generally includes a payment to or to an individual if:
- The payment is used to reimburse or pay for reasonable and necessary personal, family, living or funeral expenses incurred as a result of an âeligible disasterâ,
- The payment serves to reimburse or pay for reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence or the repair or replacement of its contents to the extent that the need for such repair, rehabilitation or replacement is attributable to a qualified claim,
- Payment is made by a person engaged in the provision or sale of transport as a common carrier due to death or personal injury suffered as a result of a qualified claim, or
- Payment is made by a federal, state or local government (or agency or instrument thereof) in connection with a qualified disaster and in order to promote general welfare.
Eligible disaster relief payments, however, cannot reimburse beneficiaries for expenses that are compensated by insurance or otherwise. Further, the IRS has taken the position that qualifying disaster relief payments do not include: (1) amounts intended to “replace wages or allowances that an individual would otherwise earn” or (2) ) âIncome replacements such as sick leave or other leave paid by an employer.
A qualified disaster includes: (1) a disaster resulting from certain terrorist or military actions, (2) certain disasters declared by the federal government, (3) a disaster resulting from an accident involving a common carrier, or from certain other events determined to be of a catastrophic nature, or (4) with respect to certain payments by certain government authorities, certain disasters determined by the competent authority to justify government assistance. In an FAQ regarding tax credits for mandatory paid vacation under the Families First Coronavirus Response Act, the IRS confirmed that the COVID-19 pandemic is a qualified disaster.
For employers and employees, qualified disaster relief payments offer several federal tax advantages over other types of relief payments:
- Eligible disaster relief payments are not subject to federal income tax. In addition, these payments are generally not treated as net self-employment income, wages or remuneration subject to tax for federal tax purposes.
- The national and local tax treatment of qualified disaster relief payments may vary from jurisdiction to jurisdiction. Eligible disaster relief payments are excluded from New York State Adjusted Gross Income to the extent that they are excluded from Federal Adjusted Gross Income, and such payments are not subject to withholding by the State of New York. New York or New York City.
- Eligible disaster relief payments can be made directly by an employer to an employee.
- The recipient does not need to be in need.
- Eligible disaster relief payments are deductible by employers to the extent that they are deductible under general tax rules. The legislative history of section 139 of the Code indicates that the exclusion of qualifying disaster relief payments from employees’ income should not prevent their employers from deducting those payments.
- Although reimbursed expenses should be reasonable and necessary, the employee generally does not have to produce receipts or justify the payment of these expenses, and there is no fixed limit on the amount of these expenses.
Qualifying Disaster Relief Payments have only a few drawbacks. In particular, recipients of eligible disaster relief payments cannot claim deductions for expenses reimbursed by those payments.
When making disaster relief payments to employees in the context of the COVID-19 pandemic, employers should keep the following points in mind:
- Payment amounts must correspond to reasonable and necessary personal, family, living or funeral expenses incurred by the employee as a result of the pandemic. Payment amounts should not be based or calculated by reference to salaries or other compensation that would have been paid to the employee had it not been for the pandemic.
- While it is not necessary for an employer to establish a formal plan before making disaster relief payments, it may be prudent to establish a written policy governing the release of such payments.
- Employees should be asked if the claimed expenses were reimbursed from another source. If an employee were to receive reimbursement for an expense from an insurance company, for example, reimbursement of the same expense by the employer would not be considered an eligible disaster relief payment, and the payment of the employer could become fully taxable.
- Although employees are generally not required to justify expenses reimbursed by qualifying disaster relief payments, employers must keep sufficient records to justify employers’ entitlement to any resulting deductions.