As the Gulf Coast continues to recover from the devastation caused by Harvey, many employers are trying to find ways to help their affected employees. Many businesses are starting crowdfunding campaigns, but the IRS allows a more tax efficient way: Disaster Relief Payments.
IRC Section 139 allows employers to give Disaster Relief Payments to their affected employees, as long as the disaster is deemed a “qualified disaster”. In addition, the payments must be used in one of the following ways:
- To reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster;
- To reimburse or pay reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence or repair or replacement of its contents to the extent that the need for such repair, rehabilitation, or replacement is attributable to a qualified disaster;
- By a person engaged in the furnishing or sale of transportation as a common carrier due to the death or personal physical injuries incurred as a result of a qualified disaster; or
- If such amount is paid by a Federal, State, or local government, or agency or instrumentality thereof, in connection with a qualified disaster in order to promote the general welfare.
As long as the funds are used in one of the approved manners, then the income is excluded from the employee’s gross income for income tax purposes. In addition, the payments are not subject to employment taxes and the employer may deduct the amounts for income tax purposes. However, employers need to coordinate with employees regarding other disaster relief payments and insurance reimbursements. If an employee receives more in reimbursements and/or disaster relief payments than the cost to repair/replace items, the excess income is taxable.
The rules surrounding Disaster Relief Payments can be complicated, but helping your employees should not be. If you are interested in giving employees Disaster Relief Payments, we suggest you consult with a professional tax advisor.