Many employers are looking for ways to provide assistance to their employees following the recent natural disasters. Paying salary or bonuses to employees means that payroll taxes are due on the amounts and also that the employees have taxable income. To provide relief from this, Congress enacted Section 139 of the Internal Revenue Code in the aftermath of 9/11, establishing a federal income exclusion for certain payments received in the wake of a “qualified disaster.”
A Qualified Disaster Relief Payment (“QDRP”) is an amount paid to or for the benefit of an individual to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster. QDRP can also 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 that repair, rehabilitation, or replacement results from a qualified disaster.
Payments that qualify are not payroll; the employer can deduct the payments as ordinary operating expenses with no payroll tax implications. The recipients can receive the payments tax-free.
Employers that that choose to make QDRP should take steps to make certain the payments provided are tax-favored qualified disaster relief payments by taking the following steps:
• Employees should identify what expenses the payments would reimburse – personal, family, living, or funeral expenses and the costs of home
repair and the replacement of personal items due to a qualified disaster.
• Confirm that the employees who will receive the disaster relief payments are within the presidentially declared disaster area or are
otherwise eligible.
• Do not make payments for expenses covered by insurance or other sources. Any amount reimbursed by another source is not eligible to be a
qualified disaster relief payment. Also do not make payments for lost income or compensation, since those payments do not qualify as
disaster relief payments.
• Have a written policy describing how payments are intended to approximate the losses actually incurred by employees. Given the
circumstances, the IRS has stated it will not require employees to substantiate their expenses in order to exclude these disaster relief
payments from their taxable income.
• Review terms of 401(k) and retirement plans to make sure that you properly include the non-taxable payments as compensation under those
plans if your plan document would require you to do so.
• Consider any state tax law implications.
For more information on how any of these rules might benefit you or your business, please contact your tax advisor or Teri Kaye, Tax Partner & Partner in Charge of the Fort Lauderdale Office, at [email protected].
