Certain Disaster Relief Payments to Employees May Be Excluded from Taxable Income
The IRS recently explained that certain payments related to the current COVID-19 outbreak may be nontaxable, enabling employees and employers to save on income and employment taxes.
Wage payments, including mandated paid leave amounts, continue to be taxable, even if paid to employees who are not providing services, because those amounts represent what an employee would otherwise earn as compensation, rather than payments to offset any particular expenses they would incur as a result of a qualified disaster. However, an employee’s taxable income generally does not include payments made to reimburse or pay for expenses related to a qualified disaster.
With COVID-19, all 50 states, the District of Columbia and all US Territories are considered disaster areas. A qualified disaster relief payment is any amount paid to or the benefit of an individual to reimburse for or pay reasonable and necessary personal, family, living or funeral expenses incurred as a result of a disaster.
For example, if an employer reimburses an employee for child care expenses that are incurred only due to COVID-19 or reimburses employees for duplicate living expenses as a result of a COVID-19 infection or exposure, those amounts would not be included in taxable income. However, if an employer gives all employees $500 for the trials and tribulations of dealing with COVID-19, those payments would be taxable.
It is important that the payments be made directly to the service provider or, if the employee is reimbursed, with proper substantiation to support the tax free reimbursement.