Whether an employee is a new hire or changing to another location, many employers pay all or part of the employee’s moving expenses as a courtesy. Many employees welcome this benefit, as moving can be expensive. The average relocation package costs employers between $19,309 and $24,216 if the person is renting and between $72,627 and $97,116 if the person owns their home.
But this benefit comes with tax implications that you must remember when you’re filing your return the following year. You might also consider the tax implications when negotiating your relocation benefit with your employer.
This post will describe a typical moving package and the resulting tax liability employees should be aware of.
Why Do Employers Offer Moving Packages?
Employers often offer moving packages as a courtesy to employees. It’s a common benefit because employers recognize the considerable expense involved in moving. They can also offer it as a hiring incentive.
How Are Moving Packages Provided?
Sometimes, the employer will pay moving expenses directly to the moving services providers. For example, the employer may book a moving company or buy a plane ticket for the employee. In other cases, the employee may pay the moving costs first and then submit the receipts to the employer for reimbursement. Another option is for the employer to provide a lump sum to the employee to cover their moving costs.
More than 15% of employees receive a miscellaneous expense allowance when relocating.
What Is Typically Included in a Moving Package?
Besides the actual move, employers may cover other expenses in a job-related relocation, such as:
The employer may pay for trips so the employee can visit their new work location, tour the neighborhood to get a feel for the area and start looking for a home.
The employer may provide temporary housing if the employee arrives before their new home is ready. This ranges from hotel or Airbnb costs for a few days to apartment rent and utilities for a few months. The employer may also pay for short-term storage of the employee’s household goods.
The employer may help the employee’s spouse find employment in the area, provide child care, and help find the right school for their children.
Buying and Selling Homes
If a company wants to make the relocation appealing to an employee, they may cover the costs of selling the employee’s old home and buying a new one. They may even buy the employee’s old home and sell it themselves later. If the employee is renting, the employer may cover the costs of breaking the lease agreement.
If the new area is more expensive than the employee’s old location, the company may offer relocation bonuses to help with the higher costs.
Are Moving Packages Considered Taxable Income?
Employer-provided moving packages are taxable as income. For example, if an employee receives $100,000 in annual salary and the employer reimbursed $5,000 for moving expenses during the year, the employee’s total gross income is $105,000. The reimbursed moving costs are considered taxable income.
Similarly, if the employer directly paid a moving company $7,000 to cover the employee’s moving costs, the employee would need to report the $7,000 as taxable income. The employee pays taxes on the moving package even though the company paid the movers directly.
Some employers will increase the moving package to account for the tax. For example, if the employer intends the employee to receive $5,000 for moving expenses, the employer may pay $6,000, so the employee will receive $5,000 after taxes. In effect, the employer is paying the tax on the employee’s behalf. This is called a Relocation Gross-Up.
The Tax Cuts and Jobs Act of 2017 eliminated tax deductions for moving for most people. Before 2017, relocation benefits were not taxable in many cases. People could even deduct the cost of their move from their federal taxes.
It’s important to consider relocation benefits when calculating your tax liability. This ensures you’ve budgeted correctly for tax season. If your employer didn’t offer a relocation gross-up, you could negotiate for a salary increase to offset your moving costs.
Also, many companies include a payback clause with relocation benefits stating that if the employee leaves the company before a certain length of time, they must reimburse the relocation costs.
How Can You Maximize Your Relocation Benefit?
If your employer needs you to move as part of your job, consider asking for a full or partial relocation benefit. If they offer a relocation package, consider meeting with them to discuss the possibility of a relocation gross-up. You can state you’re excited about the job offer and appreciate the relocation benefit but would like to avoid additional taxes. Companies are not required to offer relocation packages or gross-ups, but many do as an incentive to hire or retain top workers.
We hope you found this post, Guide to Employer Relocation Packages helpful. Be sure to check out our post, Avoid These Mistakes When Moving to a New Home for more great information.
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