Tax-Free COVID-19 Assistance for Employees
January 22, 2021 by Christine Tudrick, CPA
How employers can leverage a little-known tax law to help cover employee expenses with tax-free payments
Due to the COVID-19 pandemic, more and more workers are affected by unexpected expenses such as childcare, medical and work-from-home expenses. Employers should know that there is a way they can help, and that Gordon Advisors tax experts are available to provide guidance.
A New Classification Means New Relief
Under IRS Code Section 139, tax-free disaster relief payments are permissible for assistance related to hurricanes, floods and other natural disasters. The Coronavirus outbreak joined this list in March 2020 when the President declared the virus a major disaster undert the Stafford Act. Because of the new categorization, qualified relief payments related to the pandemic (including those made by employers) became excludable from employee gross income, exempt from payroll taxes and deductible by the employer as ordinary and necessary business expenses.
The following types of qualified disaster relief payments can be treated as tax-free:
- Reimbursements or direct payments for reasonable and necessary personal, living or funeral expenses incurred as a result of a qualified disaster.
- Reimbursements or direct payments for reasonable and necessary expenses to repair or rehabilitate a personal residence, or repair or replace its contents, on account of a qualified disaster.
Under these criteria, employers may consider reimbursing or paying employees for reasonable and necessary COVID-19-related expenses, such as:
- Medical expenses not covered by insurance including copays for COVID-19-related expenses
- Health-related expenses including hand sanitizer, face masks, sanitizing and cleaning products and sanitizing services
- Dependent care expenses due to school/place of care closings
- Tutoring and home-schooling related expenses including internet, computers and tablets to aid education and online education applications
- Work-from-home expenses including a home office setup, internet, printing supplies and equipment and cell phone costs
- Additional utility costs due to working from home
- Transportation expenses resulting from public transportation shut-downs and/or work relocation
- Pandemic-related critical care or funeral expenses of an employee or family member
- Counseling services
- Temporary housing due to known infectious exposure or preventative measures
- Non-perishable foods for reserve
- Additional travel/food expenses for students returning home from campus
Note that some payments do not qualify for tax exemption, like expenses reimbursed by insurance or other sources, payments considered compensation (lost wages, sick pay, etc.) and payments for items deemed nonessential and/or luxury.
Planning for COVID-19 Employee Relief – What’s the Difference?
Unlike other types of employee benefits and assistance plans, Coronavirus and other forms of disaster relief under Section 139 do not require written plans or many other formalities typically seen in traditional benefit plans. Likewise, employees receiving aid are not required to submit receipts or other proof of expenses, as long as amounts of payment are reasonably in-line with actual expense amounts.
Should My Company Put a Plan in Place for COVID-19 Assistance?
Even with the informal nature of tax-free disaster relief payments, businesses who want to provide pandemic relief to their employees should prepare a written policy.
Preparing a written policy for COVID-19 relief helps in a few important ways, including:
- Establishing guidelines and procedures for administrative staff and recipients to follow
- Avoiding fraudulent claims; protecting your business and saving money
- Managing employee expectations
What Should a Pandemic Relief Policy Include?
A written policy for assisting employees with unexpected COVID-19 expenses should answer the following questions:
- Who is eligible? Take extra precaution defining eligibility, as this can potentially be cited in discrimination claims.
- What types of expenses can be paid or reimbursed?
- What limits (if any) are there on payments or reimbursements?
- What are the procedures for applying for relief?
- How and when will payments be made?
Though not required by law, we advise that employers obtain a signed, written certification declaring that the payments received are necessary for COVID-19-related expenses, and that those expenses are not reimbursable by other means. Aid relief paperwork should document the particulars of the employee’s situation and how they have been directly impacted by the pandemic. Such documentation will support the deduction as business expenses in the event of a tax audit.
Where Can I Get Help With Offering COVID-19 Relief to My Employees?
All great financial plans require careful consideration and a well-thought-out course of action. The experts at Gordon Advisors have the experience to help you build a COVID-19 assistance plan for your employees. Providing pandemic relief to employees amidst this challenging time can be challenging in itself, though it doesn’t have to be. Our team can also provide guidance on relief payment policies, procedures, documentation and more.
Contact us today to discuss a pandemic relief plan that best suits your business and your employees.