Want to Help Employees Recover From Storm Losses? Offer Tax-Free Disaster Relief Payments

Employers can make tax-free “disaster relief payments” to employees who have sustained damage from the 2021 Texas winter storm that began on February 11, 2021. The payments are tax-free, as the employer can claim the payments as a tax deduction, and the employee can exclude the payments from their taxable income.

Qualified Disaster Relief Payments

IRC Section 139(a) allows individuals to exclude from their gross income any amount received as a “qualified disaster relief payment.” With President Biden’s declaration of a major disaster in the affected areas of Texas, this 2021 winter storm meets the definition of a “qualified disaster.”

Winter Storm Expenses

Under Section 139(b), a “qualified disaster relief payment” is any amount paid to or for the benefit of an individual to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster. Section 139(b) also includes additional qualifications for disaster relief payments for the repair or rehabilitation of a personal residence as well as for payments made by common carriers and government entities. For those affected by the February 2021 storm, payments to help repair residential damage to plumbing or from flooding, for example, would qualify under the section.

Payments by an employer to an employee for disaster-related expenses must be commensurate with the amount of expense reasonably expected to be incurred by the employee. In addition, expenses that are compensated for by insurance or other reimbursements are not eligible for qualified disaster relief payment treatment.

Tax Impact

Employees are not subject to federal income tax or payroll taxes on the amount they receive as a qualified disaster relief payment. Employees may also not deduct or claim a credit for any expenses reimbursed by a qualified disaster relief payment.

Employers may deduct qualified disaster relief payments as ordinary and necessary business expenses under IRC Section 162 or as a working condition fringe benefit under IRC Section 132. Since the payments are not subject to federal income tax or payroll taxes, no federal tax withholding is required.

Required Documentation

The Joint Committee on Taxation explanation about IRC Section 139 indicates that minimal recordkeeping is required for qualified disaster relief payments. Thus, employers are not required to report the payments on a Form W-2 and employees are not required to account for actual expenses. Nonetheless, employers should implement procedures to document that the amount of any such payments was reasonably expected to be commensurate with the expenses incurred.

For more information, contact us. We are here to help.

© 2021