Some employers reimburse new hires for moving expenses when they relocate. Others reimburse existing employees whose jobs are moved to other locations. Maybe you do both. Now that there’s no tax deduction for moving expenses incurred by individuals, and no more tax-free treatment for employer moving-expense reimbursements, you might wonder: Does it still make sense to reimburse employees for moving expenses?
The Tax Cuts and Jobs Act (TCJA) suspended the moving expense deduction for individuals as well as 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 military orders and incident to a permanent change of station can still qualify for the deduction and the exclusion for employer reimbursements. Loss of those tax advantages does affect employees, but that 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.
Employment tax impact
Loss of the exclusion, however, makes employer reimbursements for moving expenses 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 is exempt from these taxes if the expense has a business connection, the employee adequately accounts for the expense within a reasonable time, and any excess reimbursement is timely returned. So tax-free moving expense reimbursements weren’t subject to the employer or employee portion of the Social Security and Medicare taxes before the TCJA.
But, during the TCJA suspension period, 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.
If your organization decides to continue reimbursing moving expenses, its total cost could rise because of the employer’s share of Social Security and Medicare taxes. But reimbursements aren’t limited by the prior-law rules that applied to moving expense reimbursements that were tax-free under pre-TCJA law.
So, you now have more flexibility to define reimbursable moving expenses and could relax, or even eliminate, substantiation requirements. You can simply provide payments for unsubstantiated moving expenses as a taxable employee benefit or as part of a taxable signing bonus.
Forgoing substantiation altogether would simplify administration but, without substantiation, you’d be unable to confirm that payments were used for moving expenses and your program cost could be unnecessarily higher.
When deciding how to assist employees with moving expenses during the suspension period, you’ll need to carefully balance convenience, cost and precedent — especially if the old rules are restored after 2025. For more information, please contact us.
We highly recommend you confer with your Miller Kaplan advisor to understand your specific situation and how this impacts you.