Employer-Paid Moving Expenses
Requiring an employee to move for business reasons can be difficult for that employee. That's why many employee moving expenses are paid by employers. Here is a look at how the process of paying employee moving expenses works, including what's deductible to you as a business, what is taxable to the employee, and how to report these expenses on employee W-2 forms.
What Employee Moving Expenses You Should Pay
It's best to stick with reimbursing only those moving expenses approved by the IRS as deductions from an employee tax return.
According to the IRS, deductible moving expenses for employees include only
"reasonable expenses of:
Moving household goods and personal effects from the former home to the new home, and
Traveling (including lodging) from the former home to the new home.
Reimbursements of non-deductible expenses are always taxable to the employee, even if the reimbursement might qualify as an accountable plan (as described below).
The Tax Implications of Employee Moving Expense Reimbursements
In general, any payment you make to employees is taxable, and paying employee moving expenses is considered a taxable benefit. But there is a way to make the benefit non-taxable to the employee.
If you want the employee's moving expenses to be non-taxable to the employee (the IRS uses the term "excluded" from taxation), you must pay them through what the IRS calls an accountable plan.
In this case, the employee pays for the expenses and you reimburse them.
To meet the criteria for an accountable plan, the expenses must be itemized and only specific expenses may be paid. The expenses must also be for a business purpose.
The employee must have paid or incurred deductible expenses while performing services as an employee of your company. You may need to document that the move is required by your business.
There are also some accounting procedures that must be followed in order for the reimbursement plan to be
- The employee must "adequately account for these expenses within a reasonable period of time." That is, the employee must give you receipts for all expenditures.
- If you are giving the employee an advance on these expenses, the employee must return any excess money within a reasonable period of time.
For example, let's say you advance $5,000 for moving expenses and the employee gives you receipts for $3,660. The employee must give you a check for the balance ($1,350). If all of the criteria for an accountable plan are not met, the plan is not an accountable plan. And "reimbursements for nondeductible expenses" (to the employee) and allowances for miscellaneous or unspecified expenses are taxable to the employee.
Just to be absolutely clear: Any reimbursements made to employees under an unaccountable plan must be treated as taxable (including withholding), even if the reimbursement is for expenses that are deductible to the employee. And any payments not substantiated by receipts, even if they are part of an accountable plan, are taxable and subject to withholding.
Withholding Payroll Taxes on Moving Expense Payments to Employees
If the payments were made under the criteria for an accountable plan, and all necessary conditions have been met, the payments to employees for moving expenses aren't subject to withholding.
Moving expense payments that are not made under the criteria for an accountable plan (described above) are subject to withholding for federal income taxes, FICA taxes (Social Security and Medicare), and federal unemployment taxes.
Reporting Moving Expense Payments on an Employee's W-2 Form
If the reimbursement to the employee meets all the conditions of an accountable plan, as described above, you don't have to include these reimbursements on the employee's W-2. If the employee gives you adequate accounting for the expenses, but the excess isn't reimbursed, you will need to check with your payroll service or tax preparer to determine how to report the taxable and non-taxable amounts. You must report the amount of this benefit when you complete the W-2 annual tax report for the employee for the previous year.
Patriot Software provides more clarification on how these expenses are entered on an employee's W-2 form. We'll use the example above, where the employee receives $5,000 for moving expenses, has receipts for $3,660, and keeps the remaining $1,350. The amount the employee keeps is taxable to the employee. We'll assume this payment is done under the requirements for an accountable plan, as described above:
- The taxable $1,350 is included in Box 1 of the W-2 (and in boxes 3, 5, and 16, if taxed by the state or city).
- Federal and state income tax withholding and FICA taxes must be calculated for the taxable $1,350 and included in the appropriate boxes on the W-2.
- You must include the $3,660 (the amount equal to the substantiated amount (for example, the nontaxable portion) in box 12 of Form W-2 using code “L.”
For more details on how this works, see IRS Publication 15 (Circular E).
Giving an Employee Extra Money for Moving Expenses
Some businesses give employees a set amount for moving expenses, depending on the type of move and the distance. The payment may still be deductible to your business as a business expense.
If you want to give an employee money for moving expenses and let the employee decide how this money will be spent, you have a nonaccountable plan, according to the IRS regulations. In this case, as noted above, if you don't want the employee to have to show receipts, all of the payment is taxable to the employee as a benefit. In addition, federal income tax and FICA tax must be withheld on the payment.
In this case, you may want to want to add an additional amount to the payment to help the employee with the additional taxes that must be paid. This is called "grossing up" a check, and it's done to give the employee the exact amount of the payment, after taxes.
For example, if you pay an employee $2,000 in moving expenses, you can do a gross-up calculation to give more than $2,000 to cover the extra taxes. Patriot Software has a gross-up calculator that might help you with this.
Employee Moving Expenses Are Deductible
Payment of employee moving expenses is a deductible business expense to your business. Employee moving expense deductions for employees should be limited to those that the employee could deduct on his or her own tax return. That means just the costs for moving household goods and for travel expenses to the new location for the employee and his or her family.
Telling Employees About the Moving Expense Reimbursement Plan
As with any other employee benefit, all employees must be treated the same. You can set criteria for qualifying for the plan by employee type (salaried vs. hourly, for example), but you can't give one employee in the same classification more of this benefit than another.
It's always a good idea to put this type of benefit in writing and to include it in your communications with employees. Your employee handbook or policies and procedures manual is a good place to describe the plan. Don't forget to include information about the tax implications of this benefit.
Helping Employees With Their Moving Expense Deductions
Unless you are a qualified tax preparer, giving tax advice to employees about income tax deductions isn't a good thing to do. Encourage your employees to get professional tax advice or use professional tax software. Here are some things you can do to help employees understand this moving expense benefit and how it will affect their taxes:
- Give employees a job relocation package that explains how and when moving expenses will be reimbursed by your company.
- Give employees the opportunity to change their withholding (on Form W-4) to account for the initial reimbursement payment.