Business Response to the Coronavirus Crisis - Tax-Free Aid for Employees

By: Patrick Ungashick

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To help our clients and other business owners and leaders respond to the unprecedented leadership disruptions caused by the coronavirus (COVID-19) outbreak, the team at NAVIX offers the following crisis management information series.

Responding to Coronavirus: Tax-Free Aid for Employees

With the coronavirus crisis continuing to evolve, employees across the country are facing increased financial stress and uncertainty. Now that the coronavirus crisis has been declared a national emergency, employers have access to a little-known tool called “qualified disaster payments” to aid their employees. These payments can be tax-deductible to the company and income-tax-free to the employees.

Under Internal Revenue Code (IRC) Section 139, companies potentially can reimburse or provide employees with tax-free qualified disaster payments for expenses not covered by insurance, such as:

  • Over-the-counter medications
  • Hand sanitizers and home disinfectant supplies
  • Child care or tutoring due to school closings
  • Work-from-home expenses (like setting up a home office, increased utility expenses, higher internet costs, printer, cell phone, etc.)
  • Increased costs from unreimbursed health-related expenses
  • Increased transportation costs due to work relocation (such as taking a taxi or ride-sharing service from home instead of using public mass transit)

Section 139 expense reimbursements or payments should not replace wages, nor used for non-essential or luxury items or services.

Qualified disaster payments are federal tax-free to employees and are deductible to the employer. There is no federal reporting or disclosure, so these payments are not reported on Form W-2 or 1099 and are not subject to federal income or payroll tax withholding. However, qualified disaster payments may still be treated as wages under state unemployment insurance tax. Employers should determine on a state-by-state basis whether income tax withholding and/or unemployment insurance tax contribution obligations may arise in connection with Section 139 payments.

Additionally, Section 139 does not cap the amount or frequency of qualified disaster payments that can be made to any individual employee or all employees in the aggregate. Employers are not legally required to have a formal program to utilize Section 139. Still, some written plan is recommended to communicate the plan and set guidelines on how and when payments to employees may be made.

Like with any tax matter, employers should consult their tax advisors to discuss how Section 139 applies to them and their situation.

If you are already a NAVIX client, your advisor stands ready to help you discuss additional strategies to protect against the loss of key employees. If you are not a NAVIX client, work with your advisors or contact us about our services.

The NAVIX team has helped hundreds of business owners prepare for exit. We have also helped countless owners and leaders deal with recession, liquidity crises, and economic upheaval. Our experience and perspective enables us to guide our clients through difficult times such as these.

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