Many employers offer relocation packages to employees who are moving for work-related reasons. Moving can be stressful, tiring and expensive, so companies often pay all or part of the moving costs to incentivize valued employees to accept a new position in a different location.
This post will describe how relocation packages typically work, what businesses can deduct from taxes, and how to document payments made to an employee or service provider for moving costs on an employee’s behalf. This post may be helpful if you’re a business owner and plan to provide relocation benefits to employees.
Moving Packages Are Taxable to the Employee But Deductible for the Business
Moving packages, including employer reimbursements for relocation expenses, are fringe benefits and taxable income to the employee. They must be included when determining tax owed, tax withholding, and federal unemployment tax. They are subject to withholding for federal income, FICA, and unemployment taxes. The business must report the value of the benefit on the employee’s Form W-2.
The 2017 Tax Cuts and Jobs Act (TCJA) eliminated the federal tax deduction for unreimbursed moving expenses. However, your business can deduct the cost of moving packages as a business expense, like any other employee payments. So if your company reimburses employees for moving costs, those reimbursements are deductible for the company.
You can document relocation reimbursements in two ways: with the accountable plan process or with a nonaccountable plan.
The Accountable Plan Process for Reimbursements
In some relocation package arrangements, the employee pays their moving costs first, and the employer reimburses them. The IRS specifies certain requirements for doing this under the accountable plan.
First, the expenses must have been incurred when the employee was performing services as an employee of your company. You may also need to document the move was required by your business.
Second, the employee must submit written claims for the expenses within a reasonable time. The employee must submit receipts or detailed information about each expense, including the date, time, place, amount, and business purpose.
Third, if you provided reimbursements in advance in the form of a lump sum, and the employee didn’t use all of it, the employee must return the excess within a reasonable time.
Nonaccountable Plan
Alternatively, you might give the employee a lump sum to cover moving costs and let the employee decide how to allocate the funds. This is a nonaccountable plan, according to IRS regulations. The employee does not have to provide documentation of expenses because payments are up to the employee’s discretion.
Before the TCJA, reimbursements under the accounting plan were not taxable to the employee. But the TCJA eliminated this exclusion, so even if you reimburse the employee for documented expenses, the reimbursement is considered taxable income.
The TCJA is set to expire in 2025, and it is unknown which law provisions will be extended, if any.
Relocation Gross-Ups
Many companies offer a relocation gross-up to help an employee offset the tax bite on reimbursements of moving expenses. They provide more than the actual reimbursement amount, knowing the employee will have to pay taxes on the reimbursed amount. That way, the employee receives the exact amount the company intended.
Advising Employees on Moving Expense Reimbursements
It’s best to specify moving and other benefits in writing and distribute this information to employees and hiring candidates. You might also include information about the tax implications of relocation benefits.
You can help employees understand relocation packages and taxes by spelling out what the company is offering and how it may affect the employee’s taxes. You can also allow employees to adjust their withholding on Form W-4 to account for the relocation benefit and additional taxes.
But unless you’re a qualified tax advisor, it’s advisable to refrain from giving specific tax advice. Encourage employees to consult a tax professional or use commercial tax software.
The cost to employers of relocation packages is high: between $21,327 and $24,913 for renters and $61,622 to $79,429 for homeowners, on average. Employers naturally wish to recoup the cost, so many include a reimbursement clause with relocation packages that requires an employee to reimburse the company for the relocation package if the employee leaves the company before a certain length of time.
Relocation packages help with the monetary costs of moving, but moving to a new area is a significant undertaking that takes a physical and emotional toll. If you’re staffing a new office, hiring new employees, or moving your entire company, even the longest-tenured employees may express misgivings about moving. Listening to and addressing their concerns and fears will go a long way to helping them accept the move instead of leaving.
We hope you found this post, Guidelines For Relocation Expense Reimbursement useful. Be sure to check out our post, Challenges of Office Moving and How To Prevent Them for more great information.
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