As we go into another round of pandemic related shutdowns, many employees are suffering financial difficulties due to the COVID-19 pandemic. Employers that are financially able to assist these employees may want to consider taking advantage of Code Section 139 of the IRS tax law, which allows for non-taxable payments to employees in the event of a federally declared emergency. These expenses are not reported by the employee on their W-2, (thus they are not subject to income, FICA or FUTA taxes) but are still deductible by the employer on their tax return.
This is a fairly broadly defined section of the tax code. There has only been one IRS ruling on this tax law and there are no regulations, so there's little formal guidance for employers to follow. Any payments would need to be made at the employer's discretion and the employer should document the amounts paid to employees and what expenses were reimbursed. Eligible expenses include "reasonable and necessary personal, family, living, or funeral expenses" incurred because of the pandemic. Employers should create procedures and records indicating when the program will begin and end, who is to receive the payments, what evidence will be required to be eligible for those payments, and how payments will be made to employees. Keeping careful documentation is key in qualifying for this deduction and supporting it in the case of an audit of the tax records.
Keep in mind that payments to employees do not qualify if the expenses were also covered by insurance, or if the payments are made to replace lost income. However, some items that may be eligible for nontaxable reimbursement may include:
Funeral expenses not covered by insurance
Medical expenses not covered by insurance
Cost of tutoring or child care necessitated by the fact that schools are not in session
Costs of working from home, such as cell phone reimbursement, office supplies, increased utilities, etc
This is a little-known and rarely used section of the tax code, but employers in a position to take advantage of it may want to do so before the declaration of emergency expires in 2021.