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ISSUE 4
How Payments Can Qualify To retain tax-free status, employers and Payroll need to ensure payments associated with the disaster are made for reasonable and necessary: personal, family, living, or funeral expenses related to the disaster; costs incurred for repairing residences due to the disaster; or costs for repairing or replacing contents in the residence due to the disaster. The payments made for these expenses are excluded from employment taxes only to the extent that the employees are not otherwise compensated for the same losses “by insurance or otherwise.” This is intended to avoid excluding payments made that duplicate insurance or other benefits received for the same loss. The relief payments are not tax-free if they are intended to replace lost wages. In these cases, the amounts would be taxed the same as any other wage payment. If all the requirements to qualify under Section 139 are met, then those payments made by employers to or on behalf of employees are federal income tax-free and excluded from federal Social Security and Medicare taxation. “The relief payments are not tax-free if they are intended to replace lost wages. In these cases, the amounts would be taxed the same as any other wage payment.”
payments or valued assistance is given to workers to help them recover from a disaster. This law was passed in early 2002 due to the desire to provide meaningful tax-free help to the victims and families of those killed in the September 11, 2001 terrorist attacks. It has been applied to broader disasters, including to those affected by the COVID-19 emergency that began in 2020. Some key criteria need to be met to qualify for that exclusion, however. Primarily, any payments the employer makes must follow a “qualified disaster” under the law. This includes a federal disaster declaration from the U.S. President’s office. Requests for such a declaration come from either a state’s governor or tribal chief, and the President decides if the event qualifies for federal disaster assistance. A qualified disaster also includes events that the Treasury Secretary determines are of a “catastrophic nature,” a catastrophe that results from a terrorist or military action, or a disaster that warrants “assistance from the Federal, State, or local government agency.” Unfortunately, if the event is not deemed a qualified disaster, assistance provided to employees by employers will not be employment tax-free. Also, the law says those deemed “a participant or conspirator in a terroristic action” or their representatives are prohibited from receiving such payments tax-free.
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