Disaster Relief Payments to Employees
As a follow up to our recent tax tip, with the issuance of Internal Revenue Service (“IRS”) News Release 2012-84, the IRS has designated Hurricane Sandy as a qualified disaster under Internal Revenue Code (“IRC”) §139(c)(3) for federal tax purposes and has alerted Taxpayers that qualified disaster relief payments made by employers to their employees can be excluded from taxable income. These payments are not considered taxable wages and, accordingly, are not subject to payroll tax withholding.
IRC §139 was added to the IRC after and as a result of the terrorist attacks of September 11, 2011 to benefit victims of terrorist or military attacks or natural disasters. IRS Revenue Ruling 2003-12 provides that relief grants made for a qualified disaster area, to pay or reimburse medical, housing, or transportation are excludable from taxable income in accordance with IRC §139 whether they are made by a federal agency, state agency or an individual’s employer.
Qualified Disasters, under IRC §139(c)(3), include any disasters resulting from an event determined by the IRS to be of a catastrophic nature.
Eligible Employees include employees that reside in one of the counties listed in President Obama’s list of federally declared disaster areas. The list is included on the Hurricane Sandy page of the Federal Emergency Management Agency (FEMA) website located at https://www.fema.gov/sandy.
Qualified Disaster Relief Payments that are excluded from taxable income include the
following:
- Payments covering necessary personal, family, living or funeral expenses that were not covered by insurance, and
- Expenses incurred to repair or rehabilitate their homes or repair or replace the contents that were not covered by insurance.
In the event a subsequent insurance payment is received to cover any of the above outlined expenses, a disaster relief payment provided by an individual’s employer could become taxable.
Employer-Sponsored Private Foundations can also provide disaster relief to Hurricane Sandy affected employees without affecting their tax-exempt status in accordance with IRS Publication 3833, Disaster Relief: Providing Assistance Through Charitable Organizations. These employer-sponsored private foundations need to exercise due diligence when providing disaster relief payments to employees under the guidance included in IRS Publication 3833.
A copy of IRS News Release 2012-84, Revenue Ruling 2003-12 and IRS Publication 3833 can be accessed at the healthcare services section of our Firm’s Website.
For more information on the topics discussed or services we can provide, please contact:
Scott Mariani, JD, Partner
Practice Leader
973.898.9494 ? [email protected]
Questions or comments?
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To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
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