Should You Reimburse Employees for Moving Expenses?
- Learn how the TCJA changed moving expenses.
- Find out what employers should know about moving expenses.
- Learn about the potentially higher costs for employers who provide moving expenses and ways to minimize those costs.
For many people, summertime is moving time. With kids out of school and the weather relatively amenable in most regions, it’s the ideal time for those changing jobs or work locations to load up their stuff and head off to a new chapter of life. If your organization, like many, has expanded its hiring reach to job candidates well outside your immediate area, you might consider reimbursing new hires for moving expenses or existing employees for relocation costs. Maybe you even want to do both. Although this can certainly be an enticing fringe benefit, the applicable tax rules have changed in recent years.
TCJA Changes for Moving Expenses
Signed into law in 2017, the Tax Cuts and Jobs Act (TCJA) suspended:
- The moving expense deduction for individuals, and
- The exclusion from income (tax-free treatment) for employer reimbursements for moving expenses.
The suspension period applies to taxable years beginning after 2017 and before 2026. During this period, only members of the Armed Forces on active duty who move under a military order and incident to a permanent change of station can still qualify for the deduction and the exclusion for employer reimbursements.
What Employers Should Know About Moving Expenses
Loss of the long-standing tax breaks for moving does affect employees, but it doesn’t mean employers can’t continue paying for employees’ moving expenses. In most cases, those expenses should continue to be fully deductible by employers. Loss of the exclusion at the employee level, however, makes employer reimbursements for moving costs more expensive for your organization.
Before the TCJA, qualified moving expenses reimbursed or paid by an employer weren’t subject to federal income tax or Social Security and Medicare taxes if paid under the accountable plan rules. Under those rules, an expense reimbursement was exempt from the taxes in question if:
- The expense had a business connection,
- The employee adequately accounted for the cost within a reasonable time, and
- Any excess reimbursement was timely returned.
Thereby, tax-free moving expense reimbursements weren’t subject to the employer or employee portion of Social Security and Medicare taxes before the TCJA.
But, during the TCJA suspension period (through 2025), both the employer and employee portions of the Social Security and Medicare taxes apply to moving expense reimbursements. Unfortunately, the IRS now treats them as additional taxable wages. Federal income tax withholding also applies.
Higher Costs But …
If your organization continues reimbursing moving expenses, its total cost could be higher than in pre-TCJA years because of the employer’s share of Social Security and Medicare taxes. However, reimbursements aren’t limited by the previous rules that applied to moving expense reimbursements before the passage of the TCJA.
So, you now have more flexibility to define reimbursable moving expenses and can relax — or even eliminate — substantiation requirements. You may simply provide payments for unsubstantiated moving expenses as a taxable employee benefit or as part of a taxable signing bonus.
Forgoing substantiation altogether does simplify administration. But, without substantiation, you can’t confirm that employees are using the payments entirely for moving expenses. You might be giving them an unnecessarily large amount.
A Tricky Decision
In many industries, competition for highly skilled employees is challenging. Offering reimbursement for moving costs could give you an edge in hiring and retention. However, you’ll need to weigh the potential benefits against the higher cost, all the while bearing in mind that the old rules could return in 2026. Fiducial can provide further information and help you make the right decision.
Call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations to discuss your situation.
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