Section 139 Payments: Qualified Disaster Relief Rules

Section 139 qualified disaster relief payments are amounts paid to individuals to cover reasonable personal, family, living, funeral, home repair, or contents-replacement expenses caused by a qualifying disaster, and they are excluded from federal income tax and from employment taxes with no statutory dollar cap.¹ Employers, government agencies, and charities can all make these payments, and recipients generally do not report them on their federal tax returns.

What Counts as a Qualified Disaster

Section 139 recognizes four categories of qualifying events:

Federally declared disasters that receive a presidential declaration under the Stafford Act, which covers most major hurricanes, wildfires, floods, and earthquakes.
Terrorism or military action, as defined in Section 692(c)(2).
Common carrier accidents, plus any other event the Secretary of the Treasury determines to be catastrophic in nature.
For government general-welfare payments only, any disaster a federal, state, or local authority determines warrants government assistance. This is a broader standard than the presidential-declaration requirement.¹

That last category matters because it lets state and local governments make tax-free relief payments even when an event never rises to a presidential declaration.

Payments That Qualify

The statute defines four types of payments eligible for the exclusion. All four share one requirement: the expense cannot already be covered by insurance or another reimbursement source.

Personal, Family, Living, and Funeral Expenses

This is the broadest category. It covers reasonable out-of-pocket costs arising directly from the disaster, including temporary housing, food, clothing, medical expenses, and funeral costs. The expenses must be reasonable, necessary, and caused by the disaster itself rather than by pre-existing needs.¹

Home Repair and Contents Replacement

Payments to repair or rehabilitate a personal residence, or to replace its contents, qualify when the damage is directly caused by the disaster. This applies to homes you own and homes you rent. You cannot bundle pre-existing damage into a Section 139 payment.¹

Common Carrier Payments for Death or Injury

Transportation carriers such as airlines, railroads, and bus companies can make tax-free payments to individuals who suffer death or physical injuries in a disaster-related accident.¹

Government General-Welfare Payments

Federal, state, and local government agencies can make payments to promote the general welfare in connection with a qualified disaster. Most FEMA disaster assistance grants fall under this category. FEMA has confirmed that these grants are not subject to income tax, self-employment tax, or employment taxes, and no withholding is required.²

Payments That Do Not Qualify

The exclusion has real limits. Payments that replace lost wages, lost business income, or unemployment compensation are not qualified disaster relief payments. If an employer gives an employee $5,000 to make up for missed shifts after a hurricane, that money is regular taxable income. Section 139 targets out-of-pocket personal expenses, not income replacement.

Payments to business entities are also outside the exclusion. The statute requires the payment to be made to or for the benefit of an individual. A business with disaster-related property damage has to look to insurance, SBA loans, or other programs.¹

How the Exclusion Works on Your Taxes

A qualified disaster relief payment is excluded from gross income entirely. You owe no federal income tax on it, the exclusion applies automatically, and you do not need to itemize or file a special form. You generally do not report these payments on your federal tax return.¹

The payments are exempt from employment taxes as well. Section 139(d) provides that qualified disaster relief payments are not treated as wages or compensation for Social Security, Medicare, or federal unemployment tax purposes, on either the employee or employer side.¹

There is no statutory dollar limit. A $500 payment and a $50,000 payment receive the same treatment, so long as the amount is reasonable and necessary relative to the expenses incurred. The reasonableness requirement does real work: if an employer hands an employee an amount vastly exceeding any plausible disaster-related expense, the IRS can reclassify the excess as taxable compensation.

No Double Benefit

Section 139(h) prevents stacking tax benefits. You cannot claim a deduction or credit for an expense that a qualified disaster relief payment already covered. If a Section 139 payment reimburses you $10,000 for home repairs, you cannot also take a $10,000 casualty loss deduction for that same damage.¹

If your total disaster expenses exceed the Section 139 payment, you may still be able to claim a casualty loss for the unreimbursed portion. Food, medical supplies, and similar forms of assistance generally do not reduce your casualty loss calculation, but payments that replace lost or destroyed property do get subtracted.³

Rules for Employers Making Payments

Section 139 gives employers an unusually flexible tool. The payments are deductible as ordinary business expenses, excluded from the employee’s income, and exempt from payroll taxes on both sides.

No formal written plan is required. An employer can decide to make payments after a disaster strikes and still qualify for the exclusion. A written policy is still smart practice, because it documents eligibility criteria and gives the employer something concrete to point to during an audit.

There are also no nondiscrimination rules. Unlike health plans and retirement benefits, an employer can limit Section 139 payments to specific employees or groups without triggering the rules that normally prohibit favoring highly compensated workers. The only real constraint is that the payments must be for reasonable and necessary expenses tied to the disaster.

Reporting is minimal. Qualified disaster relief payments should not appear on an employee’s W-2 or on a Form 1099. Because the payments are not treated as wages or compensation under Section 139(d), there is no withholding obligation and no standard reporting requirement.¹ Employers should still keep internal records.

The biggest risk for employers is IRS reclassification of the payments as taxable compensation. That happens when payments look more like bonuses than relief. Common red flags include flat-dollar amounts paid to all employees regardless of whether they were affected, payments that line up with regular bonus cycles, and amounts unrelated to actual expenses. When the IRS reclassifies, the amounts become subject to income tax, FICA, and FUTA retroactively, which is costly for both sides. Payments that replace an employee’s salary or that cover costs the employee would have incurred anyway do not qualify.

Mitigation Payments Under Section 139(g)

Section 139(g) creates a separate but related exclusion for disaster mitigation payments. These are amounts paid under the Stafford Act or the National Flood Insurance Act to property owners for hazard mitigation, such as flood-proofing a home, elevating a structure, or installing storm shutters.¹

These payments are excluded from gross income and from employment taxes, with two important catches. You cannot increase your property’s tax basis by the amount of the excluded payment, so if you receive $20,000 in mitigation funds and use them to elevate your home, your basis stays the same. And no deduction or credit is allowed for expenditures covered by the mitigation payment.³

Records to Keep

Section 139 was designed for speed. You do not apply for the exclusion or file extra forms. That simplicity makes documentation more important, not less, because if the IRS questions the treatment, the burden of proof is on the taxpayer.⁴

Recipients should hold onto receipts, invoices, and contractor estimates that tie expenses to the disaster. Keep copies of insurance claim outcomes, including denials and partial payments, to show the expense was not already reimbursed. If you received FEMA assistance, keep the award letters. The goal is a paper trail showing what you spent, why the disaster caused it, and that no other source paid for it.

Employers and other payers should keep records supporting both the business expense deduction and the exclusion from payroll taxes. Useful items include the FEMA disaster declaration number or other proof of the qualifying event, the geographic area affected, the amount and date of each payment, and a description of the employee’s disaster-related losses. A short written statement from each recipient confirming that they incurred qualified expenses, describing the nature of those expenses, and affirming that insurance or other sources did not cover them adds meaningful protection if the payments are later questioned.

1
Office of the Law Revision Counsel. 26 USC 139 – Disaster Relief Payments
2
Federal Emergency Management Agency. Federal Disaster Assistance Is Not Counted as Income
3
Internal Revenue Service. FAQs for Disaster Victims
4
Internal Revenue Service. Burden of Proof