As we approach year-end, many businesses are evaluating how to express their appreciation and gratitude to their employees during these unprecedented times. The work-from-home environment has been commonplace for many employers since March, and will likely continue through year-end. With that said, some businesses may be looking for opportunities to reimburse employees for certain work-from-home expenses that have been incurred during this tax year. As an employer, it is vital to understand the rules surrounding taxable and non-taxable fringe benefits.
Generally, fringe benefits are taxable to an employee unless there is an exception within the Internal Revenue Code (IRC). In a pre-COVID-19 environment, the process of reimbursing employees for certain work-from-home expenses would require substantial documentation efforts as well as evidence that the expenses incurred were for the convenience of the employer and not the employee. The standard rule is that reimbursement of employee business expenses, including home office expenses, is generally taxable unless the employer has a formal accountable plan wherein the documentation of reimbursed expenses is submitted by the employee to support the reimbursement. However, reimbursement opportunities during the COVID-19 era require less administrative effort and provide more flexibility for both the employer and the employee.
COVID-19 is a federally declared disaster. This provides extreme flexibility for employee reimbursements under IRC Section 139. Under IRC 139, employers may make federal tax-free qualified disaster relief payments to workers for amounts to cover necessary personal, family, living, or other similar expenses. This would include work-from-home, dependent care, home sanitation, and even medical expenses. Substantiation is not required, but the amounts must be reasonable under the circumstances.
Disaster relief payments as described above do require certain implementation efforts to ensure they are respected as an allowable IRC 139 payment at both the federal and state level. Consideration should be given to privacy concerns and companywide participation, as well as the efforts of administering such a program. Given the large potential opportunities for employers and employees, it is important for all aspects of the program to be considered.
If you’d like to discuss your company’s potential interest in reimbursement for work-from-home or other eligible disaster relief payments, please reach out to a member of Kreischer Miller’s Tax Strategies group.
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