Understanding Employee Disaster Relief Payments Under IRC §139 for COVID-19

Section 139 of the U.S. Internal Revenue Code allows employers to make certain qualified disaster relief payments to employees that are tax advantaged. In response to the categorization of the pandemic as a national emergency, Section 139 disaster relief payments have escalated in relevancy given the impact of COVID-19 on the workforce. 

Additionally, the March 2020 Families First Coronavirus Response Act expanded the application of these tax-free payments, giving employers the ability to reimburse or pay employees for "reasonable and necessary personal, family, living, or funeral expenses" incurred as a result of COVID-19.

Section 139 was initially enacted after 9/11 to encourage relief payments to individuals affected by a disaster. Exempt from all employer and employee Federal, State, and Local Taxes (with the exception of the state of Arkansas), these payments are deductible business expenses for an employer.

Organizations are leveraging Section 139 "care cards" to assist employees with medical expenses not compensated for by insurance, the cost of over-the-counter medications, and the costs associated with enabling employees to work from home such as office supplies and increased cell phone costs.

IRC §139 and the COVID-19 emergency 

IRC §139(a) permits individuals to exclude a "qualifying disaster relief payment" from income. IRC Section 139 applies when, among other factors, the President declares a "disaster" within the meaning of IRC §165(i), which references a Presidentially-declared disaster under the Stafford Act. 

An employer that provides a qualifying disaster relief payment is not required to include those amounts as wages (or as self-employment earnings) under IRC §139(d). Thus, these amounts are tax-free for federal tax purposes. 

All states follow the same tax free requirements as federal with the exception of the State of Arkansas.  Arkansas does not conform to the federal treatment of specifically excluding disaster relief payments from gross income. Ark. Code Ann. § 26-51-404(a); IITN AR 5.12. I.R.C. § 139.  Employers in the State of Arkansas should review current state laws with regard to disaster relief and Section 139.

What constitutes a qualified disaster relief payment? 

The category that is likely most relevant to COVID-19 is a payment "to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster," provided that such amount is not reimbursed by insurance or otherwise. 

  • The key analysis is whether an expense is "incurred as a result of" the COVID-19 pandemic. 

The term, "qualified disaster relief payment," means any amount paid to or for the benefit of an individual: 

  • To reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster, 
  • To reimburse or pay reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence or repair or replacement of its contents to the extent such need is attributable to a qualified disaster, or 
  • 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. 

However, qualified disaster relief payments do not include payments for any expenses compensated by insurance or otherwise. 

Important Factors to Consider

  • Payments made by an employer to employees due to COVID-19 will be excludable from income if they are intended to cover reasonable and necessary personal, family, living or funeral expenses incurred.
  • Such qualified disaster relief payments also will not be treated as wages for employment tax purposes or as net earnings from self-employment for self-employment tax purposes. 
  • State conformity requirements with federal taxation for Section 139 payments.
  • 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. 
  • Although not required, employers should secure Section 139 signed statements from employees affirming that their claims arise from an area covered by the disaster declaration, that they have incurred qualified expenses, and that their expenses will not also be covered through an insurance policy. 

Federal Regulations:

In Revenue Ruling 2003-12 the IRS cited this 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 (which were not reimbursed through insurance or otherwise) were excludable from income, even though the employees were not required to provide proof of actual expenses in order to receive a grant. 


To ensure Namely customers can capture the appropriate taxability when paying an employee using IRC §139, a rules-based payroll earning code has been established in the Namely system. When administered through Namely, the corresponding tax benefits are properly structured and tracked.

This content is for information purposes only and should not be considered legal, accounting or tax advice, or a substitute for obtaining such advice specific to your business. Additional information and exceptions may apply. Applicable laws may vary by state or locality. No assurance is given that the information is comprehensive in its coverage or that it is suitable in dealing with a customer’s particular situation. Namely does not have any responsibility for updating or revising any information presented herein. Accordingly, the information provided should not be relied upon as a substitute for independent research. Namely does not warrant that the material contained herein will continue to be accurate, nor that it is completely free of errors when published. Readers should verify statements before relying on them.

Topics: Compliance

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