“In the midst of every crises, lies great opportunity.”
When President Trump declared COVID-19 to be a national emergency on March 13, 2020, it opened the door for employers to make “qualified disaster relief” payments under Section 139 of the U.S. Revenue Code that are deductible to the company, not subject to FICA taxes and tax-free to the employee. Here is an example of how it works:
Assisting via traditional bonus:
If your company has 50 employees, and you would like to provide them $1,000 each to assist them during the crisis, a traditional bonus payment will cost your company $50,000. Your company will also pay $3,825 for its one-half share of payroll taxes. As such, the total cost to your company is $53,825. Assuming the employees are in a 22% tax bracket, the net amount to each employee after payroll and income taxes is $703.50.
Assistance under a Sec. 139 disaster relief program:
If your company, instead, creates a Disaster Relief Program for its employees and decides to grant each employee $1,000 under the plan. In this new scenario, the $1,000 payment is not subject to payroll tax withholding, nor is it subject to income tax. As such, the total tax-deductible cost to your company is $50,000 (as opposed to $53,825 under a traditional bonus plan) and your employees each net the full $1,000 (as opposed to $703.50).
2020 is quickly coming to an end and if your company wants to take advantage of this situation this tax year, you need to act fast. It is highly recommended your company have a written program along with an employee acknowledgment and certification. Sec. 139 does not limit the amount of a grant under the program, but the grant must be reasonable based upon the circumstances and it cannot replace wages or compensation. You can find more information on the program at the Internal Revenue Service’s website (irs.gov) or at my firm’s website here.