Provide employees with tax-free disaster assistance under IRC 139

For the most up-to-date content on recent fires, see our Tax Planning Guide’s Disaster relief section.

Businesses can help ease the financial burden on employees who have been affected by the California wildfires and other federally declared disasters while benefiting from favorable tax treatment by utilizing Internal Revenue Code (IRC) Section 139.

IRC Section 139 excludes any qualified disaster relief payments from an individual’s gross income.

This means qualified payments, even when made by an employer, aren’t subject to:

• Income tax
• Self-employment tax
• Employment taxes, such as Social Security, Medicare, and federal unemployment taxes

What is a qualified disaster relief payment?

A qualified disaster relief payment is defined as any amount paid to an affected employee for any reasonable and necessary personal, family, living, or funeral expenses, and for any reasonable and necessary expenses to repair or rehabilitate a personal residence or its contents. There’s no dollar limit on the payments.

Employers can deduct the payments as a business expense, provided they are reasonable and meet the criteria for qualified disaster relief. If payments are deemed unreasonable, however, the excess will be included in an employee’s gross income and won’t be deductible to the employer.

Qualified disaster relief payments can include (but are not limited to) amounts paid for:

• Temporary housing or rent
• Food and clothing
• Medical expenses not covered by insurance