COVID-19-New Tax-Free Provisions for Employees

April 11th, 2020 at 1:26 PM

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. |STOP| 

How This Works 

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

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: 

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. 


Here’s a surprise: Congress doesn’t think taxpayers can account for their actual expenses because they are going through a disaster, so taxpayers are in the clear provided the payments received and treated as tax-free are reasonably expected to be commensurate with the expenses they incurred. 

Even if the IRS is generous with documentation requirements, we recommend you implement a formal, written plan with 

You should also track the names and amounts provided to each employee under the program terms. 


During the COVID-19 pandemic, you establish a plan to help employees with telework expenses, allowing each employee to get a $1,500 grant for equipment, supplies, and use of home utilities. 

Your employees Sam and Helen each apply, and each estimate they will spend $1,500 on a form you provide. 

Sam and Helen each spend approximately $1,500 on telework equipment and supplies. 

The tax results are as follows: 

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