In general, payments from employers to employees are treated as compensation; deductible by the employer, but income subject to payroll and income taxes to the employee. For employers who want to aid to struggling employees in these unprecedented times, this treatment takes the luster off from any charitable intentions they may have. Fortunately, there is a little-used section of the tax code that employers can take advantage of to help employees that may be directly impacted by COVID-19.
Internal Revenue Section 139 allows for employers to make what are labeled as disaster relief payments to employees. They incur no federal income or payroll tax on the receipt, but the employer would still be allowed a deduction.
The payments must be made for the benefit of an individual the reimburse or directly pay qualified expenses resulting from a qualified disaster. Classification by a qualified disaster can be federally declared. Due to COVID-19, all of New York State is deemed a qualified disaster.
Examples of costs that qualify for this relief include:
- Medical expenses of the employee that are not compensated for by insurance.
- Cost of over the counter medications and hand sanitizer.
- Funeral costs of an employee or member of their family.
- Costs associated with enabling an employee to work from home through the pandemic.
- Cost of an employee’s child care or tutoring for a family member that is not permitted to attend school.
Note that the intent of this provision is to provide incentives for payments to employees above and beyond. Employers cannot re-characterize an employee’s existing compensation to qualify. In order to properly substantiate any disaster relief payments, we recommend documenting intentions into a formal policy and keep records and receipts of any payments made.
Our experts are happy to further discuss your specific questions and situation. Reach out today to learn more.
The information and advice we are providing for this matter relates to COVID-19 legislative relief measures. Because legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that could modify some of the advice and information provided to you, after the conclusion of our engagement. We, therefore, make no warranties, expressed or implied, on the services provided hereunder.