In these unprecedented times in the midst of the COVID-19 pandemic, employees are likely incurring a variety of unplanned expenses, and employers may want to provide some financial assistance to their employees to help them recover from the economic hardships imposed by this pandemic.
The IRS provides some tax relief for these circumstances in the form of Internal Revenue Code Section 139 (IRC 139). This section (originally intended for natural disaster relief) allows employers to reimburse or pay employees, on a tax-free basis, for most expenses resulting from the COVID-19 pandemic other than lost wages. These payments will not be treated as wages for employment tax or as net earnings from self-employment for self-employment tax. As long as these payments meet the guidelines outlined below, they should be excluded from any W-2 or 1099 reporting while remaining deductible for the employer.
IRC 139 applies when the President has declared a disaster under the Stafford Act. COVID-19 was designated as a disaster under the Stafford Act by President Trump on March 13, 2020. Under this designation, IRC 139 allows individuals to exclude a “qualifying disaster relief payment” from their income. These are payments by an employer for any reasonable and necessary personal, family, living, or funeral expenses incurred as a result of COVID-19. IRC 139 does not affect the deductibility of these payments, so they remain fully deductible for the employer. In addition, IRC 139 does not require employers to have an established written plan in place; however, we would still recommend both the employer and employee keep track of any payments made or received under this provision and document how these payments relate to expenses incurred due to COVID-19.
Payments covered under this provision may include, but are not limited to:
- unreimbursed medical expenses
- personal health expenses like over-the-counter medicine or sanitization supplies
- funeral expenses
- child care and/or tutoring expenses due to school closings
- increased utility expenses due to quarantine and stay-at-home orders,
- costs for employees working remotely such as monitors, docking stations, or other supplies
The current situation is completely unprecedented and is not the type of “disaster” for which IRC 139 was intended. However, since the Treasury has not provided any guidance to the contrary, this section can be applied to allow employers to make payments on a tax-free basis to employees and on a deductible basis for the employer. If you have any questions about how this may apply to you or your business please contact your Blue & Co. advisor.