IRS Code Section 139 – COVID Relief for Employees

Authored by George Paulsen, Tax and Advisory Partner

IRS Code Section 139, written for 9/11 victims in 2001, may help small businesses assist employees with unforeseen costs due to COVID-19 and other recent disasters. A business can write a disaster relief program to give employees nontaxable help. The program must describe the type of expenses eligible, a maximum amount of reimbursement, and an application deadline for a specific disaster. The disaster must be an event that the IRS determines to be catastrophic in nature – COVID-19 is one such disaster. While the provisions are fairly narrow, they are designed to help a business and its employees.

Expenses that qualify in general for reimbursement include:

  • Personal, family, living, or funeral expenses incurred because of the disaster.
  • Expenses for the repair or rehabilitation of a personal residence (owned or rented) or replacement of its contents if the work is attributable to the disaster. This could work if you had employees affected by wildfires in a federally declared disaster area.

There are other items that can qualify, for the current COVID-19 disaster such as:

  • Unreimbursed COVID-19 medical expenses
  • Work from home expenses ( e.g. costs to create a home office – printer, home phone, increased utility costs on account of the home office, cost of new or expanded internet access)
  • Dependent care expenses (e.g. child care, tutoring costs, remote learning or schooling expenses, etc.)
  • Increased transportation expenses (e.g. increased commuting costs from lack of access to public transportation)
  • Other living expenses on account of employee’s known exposure to COVID-19 (e.g. cleaning products to sanitize home)

Generally, these payments are excludible from income by the employee, but still deductible by the employer.  The employer is not required to get documentation as long as the amounts are reasonable, necessary and related to the disaster. Paying an employee’s salary does not qualify. COVID-19 provisions do allow emergency paid sick leave and expanded family leave to qualify for payroll tax credits. There are also employee retention credits.

Employers can set up a program to help its employees pay for these costs, but they have to qualify as a disaster relief program under Code Section 139. If your company is interested, please contact the tax professionals at Hood & Strong who can help you set up a disaster relief program for your employees.