Tax-Free Payments to Employees Affected by COVID-19

Catherine H. Hines
Counsel, Tax Department
March 30, 2020

Since COVID-19 has been declared a national emergency, employers may now make use of existing Internal Revenue Code Section 139 to make “qualified disaster relief payments” free of income and payroll tax and withholding to employees affected by COVID-19. Qualifying disaster relief payments include payments to reimburse reasonable and necessary personal, family, living, or funeral expenses incurred as a result of COVID-19 and not otherwise reimbursed (e.g., by insurance). Although guidance is limited, it appears that employers may pay for child care during to COVID-19-related school closings, unreimbursed health care expenses related to COVID-19, and expenses incurred setting up a home office due to a COVID-19-related office closure. However, qualifying payments do not include wages or income replacements, such as paid sick leave or paid time off.

As long as the payments can reasonably be expected to be commensurate with expenses incurred, employee recipients of qualified disaster relief payments are not required by law to produce receipts to account for their expenses (although they could be required to do so by their employer). It is advisable for an employer making such payments to establish a plan under which such payments are made.