IRS Publication 3833: Employer Disaster Relief
Explore how employers can structure disaster relief payments to employees so the assistance is not considered taxable income for the recipient.
IRS Publication 3833 provides guidance for businesses that want to offer financial assistance to employees impacted by a disaster. It explains how to structure this aid through a charitable organization so that it complies with federal tax rules. This framework ensures the support is not treated as taxable income for the employee.
Understanding Employer-Sponsored Disaster Relief
When a company provides financial aid to an employee after a disaster, the delivery method has significant tax consequences. If an employer gives funds directly to an employee, that payment is considered compensation. This means the amount is subject to federal income and payroll taxes, reducing the net amount the employee receives.
The framework in IRS Publication 3833 offers a more favorable alternative. By contributing to a separate, qualified charitable organization that distributes aid, the assistance can be provided tax-free. This structure breaks the direct compensatory link, ensuring the funds are treated as relief and not wages.
Key Requirements for Tax-Free Assistance
For assistance to qualify as tax-free disaster relief, the event must be a “qualified disaster.” This includes a disaster officially declared by the President under the Stafford Act, or certain other events like terrorist attacks or common carrier accidents as determined by the Secretary of the Treasury. Aid must meet the standards for tax-free treatment under Internal Revenue Code Section 139.
The aid must be distributed through a qualified charitable organization, such as a public charity under IRC Section 501, a donor-advised fund, or a private foundation. This organization must use an objective, needs-based assessment to determine who receives aid and in what amount. This ensures assistance is based on individual circumstances and not on factors like job title or salary, which could suggest the payments are a form of disguised compensation.
The assistance must be used for specific expenses, such as reasonable personal, family, living, or funeral costs resulting from the disaster. This also includes funds to repair a personal residence or replace its contents. Payments intended to replace lost income are not considered qualified disaster relief and are taxable.
Establishing a Relief Program
To establish a disaster relief program, a business can partner with an existing public charity, such as a community foundation. This approach removes much of the administrative burden from the employer, as the third-party organization handles the application, review, and distribution of funds. This is a straightforward path for businesses that do not wish to create their own charitable entity.
Alternatively, a company can establish its own employer-sponsored charitable organization. This could be a private foundation, which offers more control but has complex compliance responsibilities, or a donor-advised fund (DAF). A DAF offers a middle ground, allowing an employer an advisory role in fund distribution without managing the entire charitable structure.
Once the charitable vehicle is chosen, the employer contributes funds to it. The charity then implements the application and selection process, including forming an independent selection committee. To maintain the program’s integrity, a majority of this committee must consist of individuals who are not in a position to exercise substantial influence over the employer’s affairs.
Tax and Reporting Considerations
An employer’s contributions to a qualified charitable organization for disaster relief are tax-deductible. The payment may be deducted as a business expense under IRC Section 162 or as a charitable contribution under IRC Section 170. This allows the business to receive a tax benefit for supporting its employees.
From the employee’s perspective, qualified disaster relief payments are excluded from gross income. This means the money is not subject to federal income tax, Social Security, or Medicare taxes. Consequently, this assistance should not be reported as wages on the employee’s Form W-2, and no payroll taxes are withheld from the payment. This ensures the full amount is available for recovery.