Generally, anything of value that an employer provides to an employee is included in the employee’s taxable wages, unless an exception applies. Since COVID-19 was declared a national emergency on March 13, 2020, employers can use Internal Revenue Code (IRC) Section 139 to make tax-free, tax-deductible “qualified disaster payments” to employees. These payments can be made on a tax-free basis until the COVID-19 national emergency declaration has been lifted.
Qualified disaster payments are payments made by an employer to an employee that are not reimbursed by insurance and are reasonably expected by the employer to:
- Reimburse or pay reasonable and necessary personal, family, living or funeral expenses incurred as a result of a qualified disaster; and
- Reimburse or pay for reasonable and necessary expenses incurred to repair or rehabilitate a personal residence or repair or replace its contents to the extent that the need for such repair, rehabilitation or replacement is attributable to a qualified disaster.
The payments should not include non-essential, luxury or decorative items or services.
With respect to COVID-19, employers can pay for or reimburse expenses (or provide benefits in kind) reasonably believed by the employer to result from the COVID-19 national emergency that are not covered by insurance. For example, employers could pay for, reimburse or provide employees with tax-free payments for over-the-counter medications, hand sanitizers, home disinfectant supplies, child care or tutoring due to school closings, work-from-home expenses (e.g., setting up a home office, increased utilities expense, higher internet costs, using an in-home printer, increased cell phone costs, etc.), increased costs from unreimbursed health-related expenses and increased transportation costs due to work relocation (such as taking a taxi or ride-sharing service from home instead of using public mass transit).
There is no Form W-2 or 1099 reporting for IRC Section 139 payments.