Employer-Paid Moving Expenses: Are They Taxable?
Relocating an employee for business reasons can take time and effort; for this reason, many of the moving expenses are paid by employers. The process of paying moving costs can become very complex, and employers should know what is deductible and how they must document and report these payments on W2 forms.
They should know that moving expenses were once tax-deductible for employees, but in 2018 this deduction was eliminated with the exception of certain states. It is expected that by 2026 moving expenses will again be deductible unless there are relevant changes in the tax law. During this time, all employee moving expenses paid by your company are subject to employee taxation.
Despite these claims, there is a solution: businesses can deduct an employee’s moving expenses as business expenses if they are included in an employee’s standard W-2 form.
Your company’s reimbursements to employees for moving expenses are considered fringe benefits. These benefits are taxable wages for the employee and must be included in the withholding calculations for federal income taxes, FICA (Social Security/Medicare), and federal unemployment tax. Even if you have a company policy that requires employees to track payments and return excess amounts, these payments are still taxable to the employee.
How to reimburse employees for moving expenses
Any payment you make to the employee will always be taxable, and paying an employee’s moving expenses is considered a taxable benefit. The 2017 tax law still needs to change this tax situation. Still, it eliminated the possibility that employers could reimburse employees through an accounting plan to prevent employees from paying income taxes on these payments.
Following an accountable plan will prevent the company from having problems in an audit.
Under this scheme, the employee pays the expenses, and the company reimburses him. Each payment must be broken down, and only specific expenses can be paid for business purposes.
Expenses must be made while the employee is on duty for your company and follow some accounting procedures:
The employee must “adequately account for these expenses within a reasonable period.” That is, the employee must give you receipts for all expenses.
If you are giving the employee an advance on these expenses, the employee must return any excess money within a reasonable period.
Payroll taxes and moving expense payments to employees.
Employee moving expenses paid by your business, even if you have an accounting plan, are subject to federal income tax withholding, FICA (Social Security and Medicare) taxes, and federal unemployment taxes. You must report the amount of this benefit when you complete the W-2 annual tax report for the previous year’s employee.
Give an employee extra money for moving expenses.
Some companies give employees a fixed amount for moving expenses, depending on the type of move and distance. The payment may still be deductible for your business as a business expense. Suppose you want to give an employee the money for moving expenses and let the employee decide how this money will be spent. In that case, you have a no-accountability plan, according to IRS regulations.
Keep employees informed about the moving expense reimbursement plan.
It’s always a good idea to put this type of benefit in writing and include it in your communications with employees. Your employee handbook or policies and procedures manual is a good place to describe the plan. Do not forget to include information about the tax implications of this benefit.
With information from: thebalancemoney.com