The President declared a national emergency in connection with the COVID-19 pandemic triggering Section 139 of the Internal Revenue Code. Thus, disaster assistance/relief payments are not taxable to the recipients if they meet certain requirements:
- The payments must be received as relief from expenses related to a qualified disaster.
- Those expenses must be for reasonable and necessary expenses; personal or family living expenses, such as medical, dental, housing, transportation or funeral expenses.
- The expenses cannot be covered by insurance or otherwise compensated or reimbursable.
Qualified disaster payments may be made from employers to employees, from employer-controlled charitable organizations to employees, or from charitable organizations to any individuals.
Disaster payments are not required to be reported or disclosed for tax purposes, including on a Form W-2 or 1099, and they are not subject to federal income tax withholding. Payments made by employers generally will be deductible by an employer.
Section 139 does not limit the number of disaster payments that an individual can receive, but payments must be reasonable and not intended to replace wages or a salary. Individuals are not required to account for actual expenses to qualify for the exclusion, provided the amount of the payments can be reasonably expected to be commensurate with the expenses incurred.
Employers should adopt a written plan or policy to make qualified disaster relief payments to clarify who is eligible for such payments, what expenses will be reimbursed, and whether the employees must provide proof of expenses to be eligible for payments. Charitable organizations need such a policy to ensure that any payments made to individuals will qualify as charitable activity, and in the case of an employer-controlled charitable organization, that disqualified persons are not eligible and that an independent committee will make the determinations as to who will receive payments and how much they will receive.