Tax Loophole Allows Tax-Free COVID-19 Payments to Employees

By John Halterman After the terrorist attacks on September 11, 2001, Congress added a little-known tax provision (Section 139 of the Internal Revenue Code) to the tax law. This little-known tax code provision exempts certain payments from taxation during a disaster or terrorist attack. President Donald Trump’s national emergency declaration triggered the disaster provisions of the tax law, including this one – where both you and your employees can reap benefits during this COVID-19 pandemic. How This Works Because of the pandemic, the tax code makes the following tax-free to your employees: Payments they receive from you for necessary personal, family, living, or funeral expenses incurred as a result of COVID-19 Payments they receive from you for reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence, or for the repair or replacement of its contents, to the extent that the need for such repair, rehabilitation, or replacement is attributable to COVID-19 The qualified COVID-19 disaster relief payments are free of income tax, payroll taxes, and self-employment tax. Not only are the payments tax-free to your employee, but they are deductible to you as a business expense, regardless of whether the payment ends up being tax-free to the employee. Payments That Do Not Work The exclusion from income does not apply to payments in the nature of income replacement, such as payments to individuals for lost wages, unemployment compensation, or payments in the nature of business income replacement. Payments to business entities don’t qualify, either. Qualified disaster relief payments do not include payments for any expenses compensated for by insurance or otherwise. Payments You Can Make Here’s an example: the IRS ruled that grants received by employees under an employer program to pay or reimburse reasonable and necessary medical, temporary housing, or transportation expenses incurred as a result of a flood qualify for this benefit. With respect to the COVID-19 pandemic, you could reimburse or pay for the following employee expenses under this guidance: Out-of-pocket medical not covered by health insurance Teleworking costs, such as a computer, office equipment, telephone, and supplies Funeral costs for an employee or an employee’s family member Childcare costs so that your employees can continue to work while children are home from school Planning Note: Because of the Tax Cuts and Jobs Act, employees may not deduct employee business expenses during tax years 2018-2025, so your reimbursement of such expenses under the disaster rules is extra valuable. Documentation Here’s a surprise: Congress doesn’t think taxpayers can account for their actual expenses because they are going through a disaster, so taxpayers are in the clear provided the payments received and treated as tax-free are reasonably expected to be commensurate with the expenses they incurred. Even if the IRS is generous with documentation requirements, we recommend you implement a formal, written plan with starting and ending dates of the program; a listing of the expenses you will pay or reimburse; the maximum payment per employee; maximum total payments through the plan; and a procedure the employee will use to request funds. You should also track the names and amounts provided to each employee under the program terms. Example During the COVID-19 pandemic, you establish a plan to help employees with telework expenses, allowing each employee to get a $1,500 grant for equipment, supplies, and use of home utilities. Your employees Sam and Helen each apply, and each estimate they will spend $1,500 on a form you provide. Sam and Helen each spend approximately $1,500 on telework equipment and supplies. The tax results are as follows: You get a $3,000 tax deduction. Sam gets $1,500 completely tax-free. Helen gets $1,500 completely tax-free. We are here to help you implement this strategy or any of the communications we have been sending. If you would like our assistance, please call us @ 304-626-3900. About John John Halterman, best-selling author and nationally published blogger, has been featured as a financial guest expert on the shows of self-help gurus Brian Tracy and Jack Canfield, author of Chicken Soup for the Soul, and has appeared on ABC, FOX, BRAVO, NBC, CBS, and A&E. John is the expert host of the weekly WDTV News 5 segment “Solutions 4 Financial Independence.” As an authority on wealth management, he has been invited by hundreds of institutions such as universities, federal agencies, professional associations, and large energy and utility corporations to be a guest speaker and educational event host. Event topics include retiring ready, managing down market investment risk, how to reduce your tax burden, and transferring your family wealth in the most tax advantageous way. John is the founder and owner of Beacon Wealth Management, specializing in helping entrepreneurs, professional practitioners, and retirees overcome the 5 major challenges facing successful families. He is a warm communicator with a passion for helping people transform their financial futures. John understands the multifaceted set of financial worries people face as they become more successful and enter the Retirement Red Zone. He empathizes personally with each client and delivers a collaborative client experience that empowers people to reach their life goals. With more than two decades of experience, John’s professional credentials include Certified Wealth Strategist, Accredited Investment Fiduciary, Certified Estate Planner, Chartered Federal Employee Benefits Consultant, Professional Plan Consultant, and Registered Financial Consultant. He is also a past member of Ed Slott’s Master Elite IRA Study Group. A native of Weston, West Virginia, John served in the United States Air Force prior to becoming a wealth advisor. Today, he resides with his family in Clarksburg, West Virginia. He and his wife, Lisa, have been married since 2005 and have three amazing children. A family-oriented man, he enjoys giving back to his community, coaching youth sports, landscaping, architectural design, and playing racquetball. #StateoftheMarkets #FinancialMarkets #BWMProcess #BeaconWealthManagement #JohnHalterman #JohnHaltermanofBeaconWealthManagement #SECUREAct #TaxLegislation #TaxTips

Learn how tax efficiency in retirement supports coordinated income planning and helps align financial decisions over time.

Navigating Tax Efficiency: How to Keep More of What You’ve Earned in Retirement

Retirement often introduces a more complex tax picture than many people expect. Instead of a single paycheck, income may come from multiple sources, each with different tax treatment. Tax efficiency in retirement focuses on understanding how these pieces work together and how timing decisions can influence tax exposure over time.  For many Second-Half Journeyers, taxes have historically been a year-end consideration. During retirement, they become an ongoing planning factor that affects income choices, spending flexibility, and legacy considerations. Taking a coordinated approach helps reduce surprises and supports more intentional decision-making. 

Read More
Learn how retirement tax planning strategies support thoughtful income decisions and long-term alignment during the second half of life.

Smart Tax Planning for the Second Half of Life

As retirement approaches, taxes often become a more visible part of financial planning. While income during working years may have been relatively predictable, retirement introduces new variables that affect how and when taxes are paid. Retirement tax planning strategies help individuals and couples evaluate how income sources, withdrawals, and timing decisions interact over the long term.  For many Second-Half Journeyers, tax planning has historically focused on filing returns rather than shaping future outcomes. In retirement, the focus often shifts toward understanding how tax exposure may change and how planning decisions today can influence flexibility in the years ahead. 

Read More
Retirement withdrawal planning focuses on coordinating income sources and timing decisions to support steady cash flow throughout retirement years.

Creating Reliable Retirement Income Through Strategic Withdrawals

Transitioning from saving to spending is one of the most significant financial shifts retirees face. During working years, the focus is often on accumulation. Retirement introduces a new challenge of turning savings into income in a thoughtful and coordinated way. Retirement withdrawal planning plays an important role in helping individuals and couples understand how to draw from their resources while supporting long-term priorities.  Many retirees hold assets across multiple account types, each with different tax treatment and rules. Without a clear withdrawal strategy, income decisions may feel uncertain or inconsistent. Retirement withdrawal planning helps bring structure to this process by aligning income needs with

Read More

Join Our Mailing List

Stay in the loop with exclusive financial insights and updates! Join our mailing list today to receive the latest news and tips from Beacon Wealth Management.

Skip to content