When a company relocates or expands its operations, it is typical for them to provide relocation benefits to employees who must relocate. These benefits can include moving expenses, temporary housing, and even reimbursement for selling the employee’s current home.
While these benefits might be beneficial to employees, they can also have tax ramifications that both employers and employees should be aware of. This post will examine whether employee relocation benefits are taxable and what businesses and employees should know about them.
What Are Employee Relocation Benefits?
Employee relocation benefits are often provided to employees who are required to relocate due to a job transfer or a company relocation. These advantages are meant to assist in offsetting some of the costs of moving, such as packing and shipping household belongings, temporary accommodation, and even the cost of selling a home.
Some common examples of employee relocation benefits include:
- Transportation Costs: This can include the cost of shipping household goods and moving the employee and their family to their new location.
- Temporary Housing: If the employee needs to stay in temporary housing while they search for a permanent home in their new location, the employer may cover the cost of this housing.
- Home Sale Assistance: If the employee needs to sell their current home to relocate, the employer may offer assistance with selling the home, such as paying for a real estate agent or covering the closing costs.
- Home Purchase Assistance: If the employee needs to purchase a new home in their new location, the employer may offer assistance with buying a new home, such as providing a down payment or covering closing costs.
- Spousal Job Search Assistance: If the employee’s spouse needs aid in finding a new job in the new area, the company may provide job search services or even job placement.
Taxable vs. Non-Taxable Employee Relocation Benefits
Some employee relocation benefits are taxable by the IRS, while others are not. Several variables, including the transfer’s purpose, the move’s date, and the type of benefit provided, determine these benefits’ taxability.
Generally, if an employee is relocating for work-related reasons, the employer may provide non-taxable relocation benefits. These benefits are not taxable income for the employee and are not subject to federal income tax, Social Security tax, or Medicare tax.
Employee relocation perks that are not taxable include:
- Reimbursement For Fair Moving Charges: If an employee gets compensated for the cost of moving their home belongings, the reimbursement is usually non-taxable as long as the charges are fair and the employee produces paperwork to back up the expenses.
- Temporary Living Expenses: If the employer pays for the employee’s temporary housing while they search for a permanent home in their new location, this is typically non-taxable.
- Home Sale And Purchase Assistance: If the employer pays for certain expenses related to the sale or purchase of a home, such as closing costs or real estate agent fees, this is typically non-taxable as long as the expenses are reasonable and the employee provides documentation to support the expenses.
On the other hand, some employee relocation benefits are considered taxable by the IRS. These benefits are included in the employee’s taxable income and are subject to federal income tax, Social Security tax, and Medicare tax. Some examples of taxable employee relocation benefits include:
- Cash Bonuses or Reimbursements: If the employer offers a cash bonus or reimbursement to cover moving expenses that are not considered reasonable or supported by documentation, these amounts are typically taxable.
- Home Purchase Assistance: If the employer provides a down payment or covers closing costs on the employee’s new home, this is typically taxable unless the employee meets specific IRS requirements to exclude the benefit from their taxable income.
- Spousal Job Search Assistance: If the employer pays for job search services or job placement for the employee’s spouse, this is typically taxable.
It’s important to note that even non-taxable employee relocation benefits may be subject to state and local taxes. Employers and employees should check their state and local tax laws to determine whether these benefits are subject to additional taxes.
How Are Taxable Employee Relocation Benefits Calculated?
When it comes to calculating taxable employee relocation benefits, there are a few different methods that employers can use. The most common method is the actual expense method, which involves tracking and reimbursing employees for the expenses related to the move.
Under the actual expense method, the employee must provide documentation to support their expenses, such as receipts for moving expenses or closing costs. The employer can then reimburse the employee for these expenses up to a specific limit set by the IRS.
Alternatively, employers can use the lump-sum method to calculate taxable relocation benefits. Under this method, the employer provides the employee with a fixed lump sum amount to cover their moving expenses without requiring the employee to provide documentation to support their expenses.
While the lump-sum method is more straightforward for employers to administer, it can result in higher taxes for the employee since the entire lump-sum amount is considered taxable income.
Common Taxable Employee Relocation Benefits
As mentioned earlier, the IRS considers certain employee relocation benefits taxable. Here are some examples of expected taxable relocation benefits that both employers and employees should be aware of:
- Cash Bonuses or Reimbursements That Are Not Supported by Documentation: If the employer offers a cash bonus or reimbursement to cover moving expenses that are not considered reasonable or are not supported by documentation, these amounts are typically taxable.
- Home Purchase Assistance: If the employer provides a down payment or covers closing costs on the employee’s new home, this is typically taxable unless the employee meets specific IRS requirements to exclude the benefit from their taxable income.
- Spousal Job Search Assistance: If the employer pays for job search services or job placement for the employee’s spouse, this is typically taxable.
Strategies for Reducing Taxable Employee Relocation Benefits
When it comes to reducing taxable employee relocation benefits, there are several strategies that employers and employees can use. Here are a few examples:
- Offer non-taxable benefits like reimbursing reasonable moving expenses, providing temporary housing, or offering job search assistance not tied to a cash bonus or reimbursement.
- Structure relocation benefits in a way that minimizes the employee’s taxable income.
- Ensure all relocation benefits are appropriately documented and supported by receipts or other documentation.
- Negotiate a lower lump-sum payment in exchange for non-taxable benefits.
- Work with a tax professional to understand the tax implications of relocation benefits and develop a plan to minimize taxes.
Employee relocation benefits can be a valuable perk for both employers and employees, but it’s essential to understand the tax implications of these benefits. While some benefits may be non-taxable, others are typically considered taxable income by the IRS. Employers and employees should work together to ensure that all relocation benefits are appropriately documented and reported to the IRS to avoid any potential tax issues. By understanding the tax rules and implementing strategies to minimize taxable income, employers and employees can maximize relocation benefits while minimizing tax liability.