Qualified disaster relief payments can be used for employees’ COVID-19 pandemic expenses
The past year has seen an unprecedented number of formerly office-bound employees reclassify as work-from-home. For some, this change will be temporary, but employers who choose to reimburse employees for work-from-home expenses like office supplies and technology upgrades may make tax-free qualified disaster relief payments to workers to cover some expenses incurred as a result of the COVID-19 pandemic, under IRS section 139.
On 3/13/20, President Trump declared a nationwide emergency under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. This allows for IRS section 139 to apply to employee expenses incurred as a result of the COVID-19 pandemic, such as those for masks and personal protective equipment, dependent care, unreimbursed medical expenses, or home office expenses (e.g., internet or office supplies). The employer is not required to obtain documentation of actual expenses as long as the amount reflects a reasonable estimate of the individual’s losses and expenses attributable to the disaster.
The benefit to reimbursing an employee via a qualified disaster relief payment and not as bonus or stipend pay is that the payment is not subject to employment taxes for the employer (yet still tax deductible) and the payment received by the employee does not have to be included in their taxable income. If your business is considering a stipend reimbursement to employees for qualifying expenses during the COVID-19 pandemic, a qualified disaster relief payment may be beneficial to both employer and employee. Contact your ShindelRock tax professional for more details.