COVID-19 disaster relief income exclusion expires May 11


The emergency declaration for COVID-19 is scheduled to expire on May 11, 2023, ending the ability of taxpayers to exclude certain payments and benefits from income as qualified disaster relief under Section 139.  


COVID-19 caused many employers to shut down operations, significantly modify operations, or continue operations with employees performing most or all of their duties remotely. Many employers began providing their employees pandemic-related cash payments and benefits on a tax-free basis, including: 

  • Stipends for increased utilities, phone, food, internet and home office costs
  • Home office equipment and furniture
  • Reimbursement or payment of additional dependent care costs
  • Payment of COVID-19-related medical costs 

Although the emergency declaration will expire, the work-from-home and hybrid conditions have become more common in the workplace. Beginning May 11, employers will have to determine whether to continue to provide employees with these benefits, and if they do, whether the benefits will be excludible from employee wages absent the Section 139 qualified disaster relief exclusion.




The disaster relief exclusion


Section 139 was added to the Internal Revenue Code in response to the Sept. 11 attacks, and allows individuals to exclude from income “qualified disaster relief payments” made in response to a “qualified disaster.” Employers may exclude payments and benefits that are qualified disaster relief payments from an employee’s income. Qualified disaster relief payments are not subject to federal income tax or withholding for Medicare or Social Security tax, but an employer retains the ability to deduct the payment and the value of the benefits from taxable income.


The term “qualified disaster” includes federally declared disasters, like the March 13, 2020, presidential emergency declaration for the COVID-19 global pandemic. A “qualified disaster relief payment” is an amount paid to or incurred for the benefit of an individual under either of the following conditions: 

  • To reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster
  • To 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 such repair, rehabilitation, or replacement is attributable to a qualified disaster. 

These payments may only be excluded from employee gross income to the extent any expense is not otherwise compensated for by insurance or otherwise. Notably, wage replacement-type payments, like qualified leave wages under the Families First Coronavirus Response Act (FFCRA), are not excludible qualified disaster relief payments, because these types of payments are intended to replace wages or compensation that an individual would otherwise earn, rather than to serve as payments to offset any particular expenses that an individual would incur due to COVID-19.




Next steps


Taxpayers that offer employee benefits that are excluded from employee income under Section 139 because of COVID-19 should determine whether an alternative income tax exclusion may apply to these benefits. If not, employers will likely need to begin including the value of these benefits in employee income and withholding the appropriate employment taxes. An increase in taxable earnings for employees could have other impacts to employers. For example, if a qualified retirement plan defines “compensation” as wages subject to income tax withholding, the business may have an increased cost for contributions to the retirement plan.



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