Provide Tax-Free Benefits in the Form of Disaster Relief Payments

When the President declared COVID-19 a national emergency, it was afforded disaster relief status with the Internal Revenue Code.  This status generally allows for payment to employees for costs incurred in coping with the disaster.  The expenses are deductible by the employer and non-taxable to the employee.

Examples of expenses that can be reimbursed are as follows:

  • Out of pocket medical expenses associated with the pandemic that are not covered by health insurance.
  • Teleworking costs such as computers, internet and office supplies for requirement to work at home during the pandemic.
  • Childcare costs permitting employees to work while their children are home from school due to the pandemic.
  • Family funeral costs for an employee or employee’s family member as a result of the pandemic.
  • Increased living costs caused by the pandemic.
  • Any other cost reasonably caused by the pandemic or the costs of working from home.

Typically, the IRS would require documentation with receipts for the costs; however, the IRS is much more lenient with regards to disaster relief.  The IRS does not require receipts, just that the amounts paid are “reasonably expected to be commensurate with the expenses they incurred”.   Please note that the payments cannot be for “income replacement.”

Other issues that pertain to disaster relief payments:

  • There is no discrimination testing.  This means you can provide this benefit to select employees if you want (you do not have to provide it for everyone).
  • This benefit is not available to S-Corporation owners or their family members.
  • We recommend keeping a list, by employee, of expenses incurred and reimbursed.  This will document the nature of the expense and the qualification as a disaster relief payment.

If you should have any questions about this program, please contact our office.

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