Summertime often signals a season of transition for many individuals. With kids out of school and favorable weather in most regions, it becomes an opportune moment for those embarking on new job ventures or relocating to pack up their belongings and embark on a fresh chapter in their lives.
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 quite a bit in recent years.
Tax Cuts & Jobs Act (TCJA) Changes
Signed into law in 2017, the TCJA suspended:
- The moving expense deduction for individuals
- 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 pursuant to 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
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 expense within a reasonable time
- 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 because they’re treated as additional taxable wages. Federal income tax withholding also applies.
Higher Costs But…
If your organization decides to continue 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 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 tough. 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 keeping in mind that the old rules could return in 2026. Our firm can provide further information and help you make the right decision.