The IRS has offered tax relief to victims of Hurricane Ian in Florida, North Carolina and South Carolina, but there is more that employers can do to assist their employees who have also been impacted.
Section 139 allows business owners to make qualified disaster relief payments to employees affected by a federally declared disaster. Section 139 qualified disaster relief payments are tax-free to the employee and are fully deductible by the employer.
These disaster relief payments can be used to help employees pay for reasonable and necessary personal, family, living or funeral expenses incurred as a result of a qualified disaster. These payments can also help toward the repair or rehabilitation of a personal home or loss of any items inside the residence. The disaster relief payments only qualify for expenses not covered or compensated by insurance. Expenses include personal property expenses, medical, housing and transportation expenses.
These disaster relief payments are not considered compensation to the employee, meaning that neither the employee nor the employer are subject to payroll taxes on the payments. Furthermore, employers can deduct these payments as ordinary and necessary business expenses.
Section 139 payments also relieve the employee or employer from producing receipts or other proof of expenses incurred as a result of the qualified disaster. The IRS states the relief payments qualify if they are “commensurate with the expenses incurred.”
Even though not required, we recommend that employers ask employees to provide documentation to ensure they meet the “commensurate with” standard. It also is a good way for employers to protect themselves against fraud or employees who may take advantage of this generosity.
While Hurricane Ian is the most recent federally declared disaster, Section 139 applies to any of the following qualified disasters:
- Federally declared disasters;
- Disasters that result from terroristic or military actions;
- Disasters or other catastrophic events that result from an accident involving a common carrier; and
- For certain government relief payments, disasters determined by applicable federal, state or local authorities to warrant government assistance (e.g., Covid-19 relief).
This exclusion does not apply to payments in the nature of income replacement, such as payments to individuals for lost wages, unemployment compensation, or payments to replace business income.
Business owners may want to consider developing a written disaster relief plan so that employees know it is available and what expenses will be covered in the event of a qualified disaster and how to expect reimbursement. Many payroll companies can assist with administering Section 139 plans.
Please contact us if you would like to learn more.