
High winds and drought conditions have fueled severe wildfires, devastating communities around Los Angeles, California. The fires have destroyed thousands of homes and businesses, while firefighters are working tirelessly to gain control. On January 8, 2025, President Biden approved a “Major Disaster Declaration” for California.
For employers looking to support their employees in these challenging times, providing financial assistance is not just a kind gesture—it’s a powerful way to offer crucial support and help employees rebuild their lives. One effective way to provide assistance is through qualified disaster relief payments under Internal Revenue Code (IRC) section 139. These payments offer significant tax advantages, both for the employer and the employee.
What Are Qualified Disaster Relief Payments?
Qualified disaster relief payments are payments made to individuals to cover expenses incurred as a result of a qualified disaster. Under IRC section 139, such payments are not considered gross income for the recipient, meaning they are not subject to federal income tax. Additionally, these payments are not considered wages or bonuses, so they are not subject to other federal employment taxes or California income tax.
Key Requirements for Qualified Disaster Relief Payments
To ensure that disaster relief payments are tax-advantaged, the following requirements must be met:
- The event must be a qualified disaster, such as the California wildfires, which are federally declared disasters.
- The payments must be intended to cover out-of-pocket expenses attributable to the disaster. This includes expenses for food, housing, healthcare, childcare, and repairs to a personal residence.
- The assistance must cover reasonable and necessary expenses, not lavish or extravagant ones.
- The payments should not be intended as wage replacements or wage supplements.
Benefits for Employers
For employers, providing qualified disaster relief payments offers significant benefits. Qualified disaster relief payments made by employers are deductible as ordinary and necessary business expenses. This means that employers can reduce their taxable income by the amount of these payments, thereby lowering their overall tax liability. In addition, these payments are not considered wages or bonuses, so they are not subject to Social Security, Medicare, or federal unemployment taxes. Finally, employers are not required to report qualified disaster relief payments on Forms W-2 or 1099. This reduces the payroll tax burden for employers.
California State Tax Considerations
According to the California Employment Development Department, qualified disaster relief payments are not subject to California personal income withholding or reportable as wages for personal income tax purposes. However, they are subject to unemployment insurance withholdings, employment training tax, and state disability insurance withholdings.
Practical Steps for Employers
To determine who qualifies for the payments and the amounts to be paid, employers can take the following steps:
- Assess immediate needs by asking employees about their urgent requirements and expenses incurred due to the disaster.
- Evaluate property damage to determine if employees have suffered any and what expenses their insurance will cover.
- Document eligibility by maintaining thorough records of disaster relief payment eligibility and ensuring proper documentation.
To ensure compliance and proper categorization of the payments, employers should clearly communicate the purpose of the payments by labeling them as “disaster relief payments” and explaining their intent to employees. Employers should also maintain detailed records of payment eligibility and request that employees retain receipts for any expenses covered by the payments.
By following these guidelines, employers can provide meaningful financial assistance to their employees affected by the California wildfires while taking advantage of the tax benefits offered under IRC section 139. For more detailed information regarding how your business can help employees during the wildfires, please contact Allison Scott, Sarah Hamill, Joanna Rivers, or your Husch Blackwell attorney.