Disaster Payments to Employees

As we are all aware, Sandy was a first class disaster the like of which this region has never seen before. One of the tax responses to this disaster, as in any federal disaster, is that employers may make reasonable disaster relief payments to employees that is deductable by the employer but is not income to the employee. This relief is not available for payments to individuals who are partners, Sub S shareholders, or owners of closely held companies.

A qualified disaster relief payment is an amount paid:

  • To reimburse or pay reasonable and necessary personal, family, living, or funeral expenses that result from a qualified disaster.
  • To reimburse or pay reasonable and necessary expenses incurred for the repair or rehabilitation of your home or repair or replacement of its contents to the extent it is due to a qualified disaster.

Qualified disaster relief payments exclude any income replacement payments, such as payments of lost wages, lost business income or unemployment benefits and would be taxable. In addition, although an employee is not required to substantiate that the qualified disaster relief payments are related to a qualified disaster, the employer may exclude such payments from income only to the extent that insurance does not otherwise compensate the employee for the loss.

To be deductible in 2012 these payments must be made by December 31, 2012.

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