Under Internal Revenue Code Section 139, employers can provide tax-free disaster assistance to employees. “Gross income shall not include any amount received by an individual as qualified disaster relief payment.” That means the employee will not pay withholding or employment taxes on the amounts received. The employer is allowed to expense the qualified disaster relief payments. Qualified payments would be for reasonable and necessary personal, family, living or funeral expenses incurred as a result of the qualified disaster.
Recent legislation included in the Disaster Tax Relief and Airport and Airway Extension Act of 2017 https://www.congress.gov/bill/115th-congress/house-bill/3823 also provides for a 40% “Employee retention,” tax credit on the first $6,000 of disaster wages, for a credit of up to $2,400 per employee. The regulations and specific guidance has not yet been made public.
If you are an employer within the disaster area, and your employees reside within the disaster area, and your business lost power for a week, yet you continued to pay the salaries of your employees, the legislation affords you the opportunity to take a tax credit for 40% of each employee’s salary for the period the business was impacted by the disaster up till the date operations were resumed, or until January 1, 2018, whichever comes first.
There are always exceptions, special circumstances, and restrictions where the affected employee has already taken advantage of another employment-related benefit. Contact your licensed tax professional or Payroll Company for more details as this legislation works its way to regulation and IRS guidance.