How Employers and Employees Can Give Disaster Assistance – and the Tax Breaks that Go with It
After any major disaster, either natural or man-made, it’s hard to stand by and watch. When you see people whose homes have been destroyed and whose lives have been uprooted, it’s a natural response to want to help.
As an employer, you may feel an urge to help your employees get back on their feet faster. Not only is it a nice thing to do – the sooner your employees get resettled after a disaster, the sooner they can shift their attention back to work.
Whatever your motivation, when you give assistance to your employees, there can be tax benefits to you and your employees, if you do it right.
Leave Sharing Programs
If you give paid leave to an employee so they can help with recovery efforts after a disaster, you can deduct that amount from your taxes as long as it is an ordinary, necessary and reasonable business expense. It is treated no differently from other compensation.
Some places set up programs where employees can donate some of their own paid leave to fellow coworkers who were affected by a disaster and could use the extra paid time off. Employees who give up their paid time off to other employees do not pay income or payroll tax on those amounts. The amount of that leave is taxable for the coworker receiving the paid leave and is subject to income and payroll taxes.
Employee Assistance and Qualified Disaster Relief Payments
If you give assistance to your employees affected by the recent hurricanes located in a federally declared disaster area, the payments you make may be tax deductible for you and not subject to tax for the employee. Qualified disaster relief payments don’t count as gross income for individuals who receive these payments.
Qualified disaster relief payments are meant to pay for “reasonable and necessary” expenses directly incurred as a result of a disaster, as long as the expense isn’t expected to be compensated from another additional source. To qualify for this treatment, payments must be:
- Personal, family, living and funeral expenses incurred as a result of the qualified disaster
- Payments to repair or rehabilitate a personal residence, as well as its contents, needed as a result of the qualified disaster
As long as the payments that an individual taxpayer receives are expected to be commensurate with the expenses that have been incurred as a result of the qualified disaster, the taxpayer generally isn’t required to account for actual expenses.
On the other hand, any payments that can be characterized as income replacement, such as unemployment compensation and payments for lost wages, are taxable and should be included in employees’ gross income.
If you have questions about adopting a leave sharing plan so employees can provide relief to each other, or if you want to make tax free payments to employees affected by the recent hurricanes, reach out to Deb Walker, CPA, National Director of Compensation and Benefits for Cherry Bekaert. Whether you’re in the middle of disaster recovery or trying to prepare ahead of time for one, it’s never too late (or too early) to get compensation and benefits advice, so you can set everything up in the most advantageous way possible.
Additional Reading and Source Material
From the IRS:
Revenue Ruling 2003-12: IRS ruling regarding tax-free disaster relief payments