When the topic of relocation arises, often the first obstacle to overcome is cost. Whether you’re the employee relocating, or the company reimbursing the moving expenses, money is often top of mind.
Of course, there are many other variables to consider, including
- Housing (buying/selling)
- Rental lease cancelation
- Household goods transportation
- Interim housing needs
- And more
The truth is moving is expensive. But the good news is relocating does offer some tax incentives for your businesses.
As relocation experts, we’re often asked the following questions:
- Are relocation expenses taxable?
- Can employees deduct moving costs? If so, which ones?
- How do I report moving expenses?
Before we dive into this topic, we first need to understand how tax laws have changed in terms of moving expenses—both for employees and employers.
You may remember after the passing of the Tax Cuts and Jobs Act in 2017, employees were no longer eligible to deduct unreimbursed business expenses—in this case moving expenses—pending two exceptions.
Prior to this act, employees were allowed to deduct qualified moving expenses, outlined by the IRS, and excluded reimbursements provided by their employers.
What this means for employees
To put it simply, any amount an employer pays a relocating employee to help cover moving expenses is added to the employee’s W2 statement. Therefore, the employee will need to pay taxes on the total amount given, in addition to their annual salary.
So, to answer the question, are relocation expenses taxable, the answer is yes. Moving expenses, including lump sum payments, are considered taxable income, which means the employee is responsible for paying both federal and state (if applicable) income tax on the amount.
What this means for employers
If you are a business paying for all, or a portion, of an employee’s moving expenses, the amount you spend is still considered a business expense, which means you can deduct the amount from the company’s taxes.
As you can see, though this benefits you, the employer, it does put a slight disadvantage to your relocating employees—making the decision to move or accept your coverage of relocation benefits less attractive.
To help solve this issue, employers are gravitating toward the practice of tax gross-ups.
What are tax gross-ups?
Tax gross-ups are calculations that are designed to relieve some or most of the tax liability your employees may encounter with the taxes related to their direct billed or reimbursed relocation costs.
How it works:
The employer, based on their gross-up policy, will aid in the burden of the expected tax liability for the employee. This is done by paying tax assistance directly to the related tax authorities on the employee’s behalf.
Relocating can be complicated. But it doesn’t need to be. At Relocation Today, our team can help you build a competitive relocation policy, including a review or discussion of tax assistance/gross up options that fit best with your company’s culture.
To learn more about our capabilities, contact us today for a consultation.
Disclaimer: The information presented in this blog is intended for general information purposes only and is not intended as tax advice. Be sure to consult with a qualified tax specialist for questions about taxable moving expenses and deductions.