Employers Can Assist Their Employees Affected By Disasters – And It Can be Tax-free!

Yesterday I posted information from an IRS announcement regarding tax assistance being offered to those individuals and businesses impacted by hurricane Helene.

Employers can also provide help to their workforce and should know that this can be done in a tax-free manner!

IRS code section 139 details how to treat Qualified Disaster Relief Payments – financial assistance made to employees harmed by a disaster – without the assistance being taxed as income. Find details at the website www.IRS.gov.

?Here are the Key Points:

1.?? Payments – employers can provide certain payments to employees that are tax-free, provided the payments are to reimburse or cover the following:

a.?? Personal, family, living or funeral expenses incurred,

b.? Expenses for repairing or rehabilitating a personal residence or replacing its contents that were damage by the event.

2.?? Qualified Disaster – The qualifying event must be federally declared, which includes natural disasters (such as hurricanes, floods, earthquakes) or significant emergencies (pandemics, for example).

3.?? Non-taxable to Employees – These payments are not considered taxable income to the employee, meaning they are excluded from wages and not subject to income tax, payroll tax (FICA), or unemployment taxes. They may or may not be taxable at the state levels. State tax laws vary, so check with the applicable state.

4.?? ?Deductibility by Employers - Employers can take these payments as ordinary and necessary business expense.

5.?? Eligible Payments – Mentioned above do not need to be justified by receipts, but they should be reasonable in amount and related directly to the disaster.

6.?? Exclusions - There is no double-dipping! Payments that would otherwise be covered by insurance or any other reimbursement programs are not eligible. Also excluded from this tax benefit are payments for non-essential or luxury items.

You may wonder why this benefit is allowed by the IRS. Our government has a social responsibility to provide relief and usually does so through FEMA, other government programs and charitable organizations. The government appreciates businesses who shoulder some of this expense that otherwise might be funded by FEMA, so allowing this preferential treatment to individuals and employers is a favorable exchange.

Other Information and Best Practices:

1.?? Formal Reporting Requirement- Employers are not required to report the disaster relief payments on employees' W-2s or 1099s, as these payments are not treated as taxable income. And employees do not need to include these payments in their gross income on their individual tax returns.

2. Documentation and Recordkeeping- While there is no need to report the payments to the government, employers should still maintain proper documentation to ensure compliance in the event of an audit. Good practices include:

a. Documenting the nature of the disaster (i.e., confirming it is a federally declared disaster).

b. Keeping internal records of the payments made, including the amounts, dates, and the specific disaster-related expenses they are intended to cover.

c. Employee certifications are a good idea to attest that the payments are being used for qualified disaster-related expenses.

Conclusion:

There is no formal registration or reporting required with government agencies to provide tax-free disaster relief payments to employees, but maintaining thorough records and policies is recommended to ensure compliance with IRS rules. Remind employees these reimbursements replace insurance claims or FEMA payments, and they are responsible for being honest and truthful for the out-of-pocket costs they need reimbursed.

I hope you find this information useful and will share it with others. Feel free to reach out with questions. [email protected]

If you are a current client of AECC we are happy to assist with coordinating these payments on your behalf and will do so complimentary for those affected by hurricane Helene.

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