SMALL BUSINESS TIPS

PANDEMIC PROVISION

FOR TAX-FREE PAYMENTS TO YOUR EMPLOYEES

During a federally declared disaster, such as the COVID-19 pandemic, the tax code allows you to make payments to your employees that are deductible by you, the employer, but not taxable to your employees. If your business is an S-Corporation then you qualify as an employee of the business eligible for these tax-free payments. This provision provides a great limited-time opportunity to pull money out of your business tax-free! These tax-free payments are a provision of Section 139 of the Internal Revenue Code which was passed following the September 11th terrorist attacks.

How Does it Work?

Normally, payments of cash to your employees are considered taxable income to them by the IRS unless it is to reimburse them for qualified business expenses. Under this provision for disaster relief payments you can reimburse your employees for personal expenses that are incurred because of the disaster as long as they are reasonable and necessary. For the COVID-19 pandemic this can include:

Out-of-pocket medical costs not covered by health insurance
Expenses for working from home such as a computer, office equipment, supplies & utilities
Funeral costs for an employee or an employee’s family member
Childcare costs so that your employees can continue to work while children are home from school

These are the most common costs that could be reimbursed, but others may qualify for the same tax-free reimbursement if they are reasonable and incurred because of the pandemic.

What Does not Qualify?

You cannot use this provision as a substitute for your employee’s wages to provide them with tax-free income. In other words, do not reduce an employee’s wages by $1,000 and then reimburse them for a $1,000 medical expense. You can also not reimburse employees for lost wages, or as a form of unemployment compensation.

What Should You Do?

To take advantage of these tax-free disaster relief payments to your employees we recommend that you put together a written plan for payments that identifies:

Starting and ending dates of the program
A listing of the expenses you will pay or reimburse
The maximum payment per employee
A procedure for your employees to request reimbursement

We would advise using a form similar to an employee expense report for your employees to request their disaster relief payments. To make things a bit easier, the IRS does not require that your employees provide documentation to support the expenses claimed as long as the amounts are reasonable.

Summary

With COVID-19 declared a federal disaster, you can take advantage of the disaster relief payment provision of the Internal Revenue Code to provide tax-free payments to your employees to cover their personal expenses that were incurred because of the pandemic. If your business is structured as an S-Corporation you as the owner are considered an employee and can reimburse your personal expenses with tax-free payments from the business. If you would like help determining what expenses are eligible for disaster relief payments or would like guidance on implementing this program for your employees please reach out to us.