Tax-Free COVID-19 Payments to Employees

After the terrorist attacks on September 11, 2001, Congress added a little-known tax provision to the tax law. This little-known tax code provision exempts certain payments from taxation during a disaster or terrorist attack.


President Donald Trump’s national emergency declaration triggered the disaster provisions of the tax law, including this one—where both you and your employees can reap benefits during this COVID-19 pandemic.

How This Works

Because of the pandemic, the tax code makes the following tax-free to your employees:

• Payments they receive from you for necessary personal, family, living, or funeral expenses incurred as a result of COVID-19
• Payments they receive from you for reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence, or for the repair or replacement of its contents, to the extent that the need for such repair, rehabilitation, or replacement is attributable to COVID-19

The qualified COVID-19 disaster relief payments are free of income tax, payroll taxes, and self-employment tax.


Not only are the payments tax-free to your employee, but they are deductible to you as a business expense, regardless of whether or not the payment ends up being tax-free to the employee.

Payments That Do Not Work


The exclusion from income does not apply to payments in the nature of income replacement, such as payments to individuals for lost wages, unemployment compensation, or payments in the nature of business income replacement.


Payments to business entities don’t qualify, either.


Qualified disaster relief payments do not include payments for any expenses compensated for by insurance or otherwise.


Payments You Can Make


Here’s an example: the IRS ruled that grants received by employees under an employer program to pay or reimburse reasonable and necessary medical, temporary housing, or transportation
expenses incurred as a result of a flood qualify for this benefit.


With respect to the COVID-19 pandemic, you could reimburse or pay for the following employee expenses under this guidance:

• Out-of-pocket medical not covered by health insurance
• Teleworking costs, such as a computer, office equipment, telephone, and supplies
• Funeral costs for an employee or an employee’s family member
• Child care costs so that your employees can continue to work while children are home from school

Planning note. Because of the Tax Cuts and Jobs Act, employees may not deduct employee business expenses during tax years 2018-2025, so your reimbursement of such expenses under the disaster rules is extra valuable.

We can help you implement this plan.  If you would like our assistance please contact us at info@spenceraccounting,com or click here.