New Tax Guidance for ARPA Premium Pay, Direct Cash Assistance

IRS releases new FAQs on taxability ARPA Recovery Funds – specifically related to direct cash assistance and premium pay.

The Coronavirus State and Local Fiscal Recovery Funds (SLFRF) Program provides a substantial infusion of resources to communities working to turn the tide on the pandemic, address its economic fallout, and lay the foundation for a strong and equitable recovery.

The SLFRF provide substantial flexibility for each government to meet local needs — including support for households and individuals hardest hit by the crisis. More information about the uses of SLFRF may be found in the Interim Final Rule.

Some uses of SLFRF may trigger tax consequences. In general, individuals must include in gross income any payment or accession to wealth from any source unless an exclusion applies.

One exclusion is for qualified disaster relief payments under section 139 of the Internal Revenue Code. Under section 139, certain payments made by a state or local government to individuals in connection with the COVID-19 pandemic may be qualified disaster relief payments that are excluded from the recipient’s gross income.

According to the National Association of Counties,

Key highlights of the guidance include:

  • Individuals must include premium pay in gross income as compensation for services. This includes an employee of a state/local government AND an individual that received premium pay from a third-party employer that received a grant from a state/local government.
  • Individuals must include cash bonuses in gross income as compensation for services. This includes a bonus directly from a local government AND from a third-party employer.
  • Direct cash transfers to households/families (cash used for child care assistance, utility, etc.) is NOT included in gross income. These payments, made by the state/local governments, are intended to pay for family expenses resulting from the COVID-19 pandemic — a qualified disaster.
  • If a county provides a direct cash transfer to individuals/families with Recovery Funds, a Form 1099 is not required.
  • If a utility company uses Recovery Funds to pay overdue utility balances for individuals, a Form 1099 is not required.

Visit the IRS website for more information.

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