Internal Revenue Code Section 139: Disaster Relief – Employers Helping Employees
Hurricane Florence made landfall in North Carolina on September 14, 2018 as a Category 1 hurricane and brought with it a record amount of rainfall and a massive loss of power throughout the state of North Carolina, as well as parts of South Carolina. When the winds decreased, the rains came. The magnitude of the storm brought destruction for an extended period of time. On September 15, 2018, President Trump approved a major disaster declaration for certain counties in North Carolina.
Some business owners have asked if they can provide support for their employees, and if so, what the tax consequences are.
Thankfully, under Internal Revenue Code Section 139, an employer can make tax-deductible payments to help an employee and the payments do not have to be included in the employee’s income, provided that all rules are followed and the qualifications are met. This means the payments the employer makes to the employee are not treated as wages or compensation, which makes the payments nontaxable. No federal income tax is withheld and the payment amounts are not subject to FICA taxes.
To be eligible, the following qualifications must be met:
- The disaster must be a “qualified disaster” (like Hurricane Florence);
- The employee must reside in the “qualified disaster” zone (see counties listed below); and
- The payments must be made as a result of the disaster for expenses that are considered eligible under Internal Revenue Code Section 139 (see below).
The “qualified disaster” zones are the counties that President Trump declared were affected by Hurricane Florence and, therefore, are in need of federal assistance. Currently, 8 counties in North Carolina have been declared as “qualified disaster” zones including Beaufort, Brunswick, Carteret, Craven, New Hanover, Onslow, Pamlico, and Pender counties.
The third point requires due care. A qualified disaster relief payment must either:
- be paid for reasonable and necessary personal, family, living, or funeral expenses; or
- be paid for reasonable and necessary expenses suffered for the repair or rehabilitation of their personal residence or the repair or replacement of the residence’s contents due to the “qualified disaster”.
However, in addition to meeting the requirements above, the payment or reimbursement given cannot also be used for damages covered by the employee’s insurance. In other words, the employee cannot “double-dip” and receive tax-free assistance from their employer and tax-free insurance proceeds.
While Hurricane Florence caused much devastation, it also shows how strong our communities truly are. Now that the storm has passed, we are in the process of cleaning up while returning to a sense of normalcy. If you are an employer seeking to help out, Internal Revenue Code Section 139 is certainly something to consider. As always, the employees of Earney & Company, L.L.P. are here to discuss this with you if you need further information.