Code Sec. 139(a) permits individuals to exclude a “qualifying disaster relief payment” from income. Code Sec. 139 applies when, among other factors, the President declares a “disaster”.  A “qualified disaster” includes, an event declared a major disaster or an emergency declared by the President.

An employer who provides a qualifying disaster relief payment is not required to include those amounts as wages of the employee.  Thus, these amounts are effectively tax-free for federal tax purposes.  The relevant question is what constitutes a “qualified disaster relief payment”.  Whether a particular payment is a qualifying payment is factual in nature.  Under current guidance, voluntarily continuing wages when a business is closed (by order or otherwise) probably doesn’t qualify.  However, if an employee is teleworking and incurs new expenses (e.g., childcare as a result of school closures) those new expensed likely meets the definition.


Code Sec. 139 provides that gross income does not include any amount received by an individual as a “qualified disaster relief payment.”  Code Sec. 139(d) further states that a qualified disaster relief payment will not be treated as wages for employment tax purposes or as net earnings from self-employment for self-employment tax purposes.  In essence, these payments are tax free.

The term, “qualified disaster relief payment,” means any amount paid to or for the benefit of an individual, if not reimbursed by insurance, to reimburse or pay reasonable and necessary:

  1. personal, family, living, or funeral expenses incurred as a result of a qualified disaster;
  2. expenses incurred for the repair or rehabilitation of a personal residence or repair or replacement of its contents to the extent that the need for such repair, rehabilitation, or replacement is attributable to a qualified disaster,
  3. by a person engaged in the furnishing or sale of transportation as a common carrier by reason of the death or personal physical injuries incurred as a result of a qualified disaster, or
  4. if such amount is paid by a Federal, State, or local government, or agency or instrumentality thereof, in connection with a qualified disaster in order to promote the general welfare,

The legislative history indicates that a qualified disaster relief payment may be from any source, including an employer.  The legislative history further provides that individuals will not be required to account for actual expenses in order to qualify for the exclusion, provided that the amount of payments can be reasonably expected to be commensurate with the expenses incurred.

In prior guidance the IRS cited legislative history and ruled that employer grants to employees to cover medical, temporary housing, and transportation expenses incurred as a result of a presidentially declared disaster were excludable from income, even though the employees were not required to provide proof of actual expenses in order to receive a grant.

Deductibility of Payments

Payments by the employer are deductible.  Employers do not need to require employees to document their actual expenses, provided that the amount of the relief payments are reasonably expected to be commensurate with the expenses incurred.  However, employers should secure a signed statement from each recipient that their claims arise from an area covered by the disaster, that they have incurred qualified expenses, and that their expenses will not also be covered through an insurance policy.