Tax Treatment of Employer-Paid Relocation Expenses

By hrlineup | 27.01.2021

Receiving a job relocation letter can be exciting and worrying at the same time for employees. The exciting part is that most probably employees will get a salary raise. But are they prepared for relocation expenses? Employees find job relocation costly because employers give short notices. For this reason, an employer must cater to the relocation expenses taxable to employees.

Your employee’s relocation expense is considered a fringe benefits and should be taxable to the employee. The law requires that employers include these benefits in the federal taxable income. If you have a policy where your employees can track and return extra payment expenses, you still must file a tax return.

Simply put, all employee expenses are taxable, including the relocation expenses. Most organizations will allow employees to use their funds to relocate and later reimburse them. The employer must ensure that these taxable relocation expenses are strictly for the purpose relating to the company. You can then state that the organization requires this move to happen and account following the below procedures;

  • Your employee needs to state the relocation & moving expenses and provide receipts for each payment. They must also note the time in which the expenditure was made.
  • In cases where you provide the relocation funds, the employee must provide receipts showing the expenses and the remaining balance. These receipts must state the time in which they were acquired.

When an employer files employees’ tax reports for the previous year, they must specify the relocation amount. The IRS states that when you allocate relocation funds to your employee and don’t want receipts, this plan is non-accountable. In that case, the employer must file the employee’s taxable return as a fringe benefit.

It’s no brainer that all employees must receive equal treatment. That said, an employer must set requirements or criteria to qualify for relocation. You can base the criteria on salaries and wages (either weekly or monthly). Once you relocate your employees in the same category, you must not allocate more funds to one than the others.

Communicating with your employees on matters affecting the organization is essential. To ensure all employees understand the relocation procedure, you may have to write employees’ relocation benefits in the employees’ handbook. Do not forget to include a tax implication policy for better understanding.

Final thoughts

When your employees are knowledgeable about relocation policies, they quickly handle relocation matters as they arise. It is wise for employers to be on the frontline of providing fringe benefits package for relocation. This benefit must show the time for relocation and when the relocation funds will be reimbursed.

It wouldn’t be wise if you advise your employees on relocation tax matters. Instead, try to encourage them to get legal tax advice. You may also need to seek the services of a professional relocation management company. Hiring the company will ensure seamless accounting for relocation expenses. If you fail to file a employees’ taxable benefit, you may encounter problems, including fines from the IRS.