Tax Treatment of Employer-Paid Relocation Expenses
Relocating for business reasons can be difficult—and expensive—for an 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, how to document these payments, and how to report these expenses on employee W-2 forms.
Tax Law Changes and Moving Expenses
The 2017 tax law (the Tax Cuts and Jobs Act) includes some changes to deductions for moving expenses for employees, effective for the 2018 tax year through 2025. This law removes the deduction for unreimbursed business expenses, including moving expenses. That means these expenses are no longer deductible to the employee on Schedule A. This change also affects owners of C corporations and S corporations who are also employees of the business.
Reimbursements by your business to employees for moving expenses are considered fringe benefits. These benefits are taxable wages to the employee, and they must be included for federal income tax withholding, FICA (Social Security/Medicare), and federal unemployment tax. Even you have a company policy that requires employees to keep track of payments and give back excess amounts, these payments are still taxable to the employee.
If your business treats employee moving expenses as taxable (W-2) wages for the employee, your business can still deduct the cost of these expenses as a business expense.
Just to be absolutely clear: Effective from 2018 through 2025, all employee moving expenses paid to employees by your business are taxable to the employee. Unreimbursed employee moving expenses can't be deducted by the employee as miscellaneous expenses. Your business can still deduct these payments as business expenses.
How to Reimburse Employees for Moving Expenses
In general, any payment you make to employees is taxable, and paying employee moving expenses is considered a taxable benefit. The 2017 tax law didn't change this tax situation. But it took away the possibility that employers can reimburse using an accountable plan (explained below) to avoid having the employee pay income taxes on these payments.
It's a good idea to follow the accountable plan process to document employee reimbursements, so you can avoid problems in an audit.
Here's how a reimbursement plan works: The employee pays for the expenses and you reimburse them. 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 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.
- 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 $3,650. 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.
Payroll Taxes and Moving Expense Payments to Employees
Employee moving expenses paid by your company, even if you have an accountable plan, are subject to withholding for federal income taxes, FICA taxes (Social Security and Medicare), and federal unemployment taxes.
You must report the amount of this benefit when you complete the W-2 annual tax report for the employee for the previous year.
To clarify 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 $3,650, 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 $3,650 (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 the 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.
Employee Moving Expenses Are Deductible
Payment of employee moving expenses is a deductible business expense to your business.
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, you should not be giving tax advice to employees about income taxes. 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 relocation benefit and their tax liability.
IRS Information about Employee Moving Expenses
IRS Publication 521 - Moving Expenses
IRS Publication 15 - Circular E - Employer's Tax Guide
IRB Publication 15b - Employer's Tax Guide to Employee Benefits
This article and all information on this site presents general information and is not intended to be tax or legal advice. Refer to IRS publications for more details. Each situation is specific; refer questions to your tax advisor.