Employers who have or will provide COVID-19 related stipends or payments to employees may be able to make these payments tax-free. Under the Internal Revenue Code Section 139, qualified disaster relief payments made to employees due to a qualified federal disaster will not be taxed as income. When President Trump declared COVID-19 to be a national emergency, it allowed employers to provide tax-free financial support. Based on President Trump’s declaration, the IRS interpreted that certain payments related to COVID-19 qualify as a disaster relief payment.
Employers can give their employees cash to help them through the disaster and the employee will not have to pay income tax on the cash received. Additionally, the payments made to the employee are fully deductible from the employer‘s portion of payroll tax because these payments are excluded from gross income and compensation for purposes of employment taxes. Payments are not included on the W-2 or 1099.
According to tax and advisory firm BDO, employers can provide tax-free payments to expenses* such as:
Over-the-counter medications, hand sanitizer, and home disinfectant supplies
Child-care or tutoring due to school closings
Work from home expenses such as setting up a home office, increased utilities, expenses, and internet costs
Increased commuting costs, such as taking a taxi instead of using public mass transit
Unreimbursed health-related expenses
*Excluding nonessential products and services.
Wage replacement payments are excluded from Section 139. Wage replacement are payments received for paid leave, such as sick, disability, or paid family leave. These payments remain subject to income and payroll withholding and reporting.
Steps to adopt Section 139:
Check your state tax laws. State and local tax treatment of disaster relief payments may vary from jurisdiction to jurisdiction. NY state mirrors federal tax treatment; therefore, payments are not subject to NY and NYC withholding.
Adopt a written plan. Although not required by the IRS, it is prudent for employers to establish procedures and communicate with their employees. This plan can include the following:
List of reimbursable expenses or a per-employee allowance for presumed reasonable expenses
Describe the method of reimbursement/payment
Provide any employer-imposed limit on expenses
Name the administrator of the program
Start and end date of the program
Please contact Diana Gallardo with any questions.