On March 13, 2020, the COVID-19 pandemic was officially announced as a nationwide emergency. This allows employees to exclude certain qualified disaster relief payments that are usually considered taxable from their total income. Employers will be allowed to deduct these expenses on their end fully. Eligible disaster relief payments are not subject to federal income tax or employment tax withholding and do not need to be reported on an employee’s Form W-2
Qualified disaster relief payments are payments to an employee for individual, family, living, or funeral expenses resulting from a qualified disaster. Those could include:
- child care
- for example increased child care or tutoring costs due to school closings, or remote learning materials
- medical expenses
- for example, copays incurred, vitamins or over-the-counter medications to treat coronavirus
- work from home expenses
- for instance, costs correlated with running a home office
- transportation expenses
- funeral expenses
- well-being expenses
- for example mental health and physical programs
- other living expenses
- for example increased meal costs and utilities due to being quarantined at home, hand sanitizer, and home disinfectant supplies
Note that payments must be to reimburse reasonable and necessary costs. If the payments are unreasonable, those excess amounts will be included in an employee’s income, and may not be deductible.
Reimbursements must be for expenses and not in place of income.
There is no limit to how much reimbursement an employer could provide an affected worker.