On May 11, the emergency declaration for COVID-19 expired, bringing with it tax consequences for employers and employees.
Key Details
- As companies adapted to restrictions during the COVID pandemic, there were many unknowns about how benefits and payment solutions would affect employees in the long run.
- In some cases, reimbursements and stipends to keep employees on the payroll would exceed the typical benefits, resulting in complicated tax filings for the employees.
- However, section 139 of the Tax Code states, “Gross income shall not include any amount received by an individual as a qualified disaster-relief payment,” making relief payments tax-free for the employee and deductible for the employer, Forbes reports.
- But now that the emergency is officially over, COVID benefits will fall into a different tax category.
Why it’s news
Section 139 gave Americans needed relief during the pandemic and freed up employers to help their workers. Now that the emergency is officially declared ended, accepting additional benefits could mean paying more taxes.
During this most recent tax season, many COVID-related payments did not appear on employees’ W-2 forms. These benefits included reimbursements for COVID tests and payment for transportation when public transportation was temporarily shut down. Some employers also provided stipends for dependent care, such as covering daycare expenses. Others were reimbursed for making technical upgrades that allowed them to work from home.
At the time, the IRS did not provide specific guidelines to help employers determine which benefits would fall under section 139. However, most employers could follow a general guideline that helped them determine which benefits qualified. If the only reason a benefit was provided to employees was because of the pandemic, it would most likely qualify under section 139, Forbes reports.
While expenses like COVID tests or remote work equipment easily fell under these provisions during the emergency declaration, they will no longer be tax-exempt now that the emergency is over. Employers are now faced with the decision to end these benefits, embrace the new taxes, or find another section to make them deductible.
All of these options present problems for employers. If they simply discontinue benefits, companies may lose some employees who have grown used to the extra coverage. Continuing the benefits could present too significant an obstacle for employers and employees. Both could end up with a higher tax bill. Finding another section where these benefits may be deductible is the most helpful solution.
Section 132(d) may provide an answer. Under this tax law, employers can provide employees with items like computers and reimburse them for remote work expenses under certain circumstances.
While businesses may be able to continue providing benefits, it could take them time—and some work—to find a viable solution that benefits both employee and employer.
