One of the many deductions temporarily eliminated in the Tax Cuts and Jobs Act (TCJA) passed in December 2017 was the moving expense deduction. This was a deduction for certain expenses incurred by individuals who relocated for a new job or to begin a new business. This change in the tax law not only eliminated the deduction for individual taxpayers, but it also changed the way employers will have to handle reimbursements or direct payments for such expenses related to their relocation policies.
Prior to 2018 employers were allowed to exclude from reportable wages any payment on behalf of or reimbursement to employees for relocation-related expenses provided such costs would have been deductible had they been paid directly by the employees. This included items such as transportation and lodging for the employee’s family and the packing and shipment of the employee’s household goods and personal effects. Because such employer expenditures were not treated as taxable compensation no withholding taxes were required.
Beginning in 2018 however, all employee relocation expenses – either reimbursed to the employee (e.g. airline tickets) or paid directly by the employer (e.g. shipping costs) are required to be included in taxable wages. This will require payroll departments to coordinate with accounts payable to identify employee-related expenses that previously has been disregarded for payroll witholdings. Further, all such amounts are now subject to federal income tax, FICA, and Medicare withholding.
Most states conform to Federal tax law. As such they will also require inclusion of any relocation-related expenses and reimbursements in state taxable wages. There are however a number of states that do NOT conform to federal law. Each of these states must provide guidance as to the proper treatment of employer-funded relocation expenses for wage reporting purposes. New York and New Jersey are two of the states that do not conform to Federal income tax law, and each has determined that such costs can continue to be excluded from taxable wages.
Because the costs of employee relocations are typically fully borne by the employer, any tax withholdings required due to the changes under TCJA will most likely also be funded by the employer via a tax ‘gross-up’. While such tax gross-ups may legally be made at the supplemental withholding rate for special/non-periodic payments (22% for 2020), this may result in additional taxes being owed by highly compensated employees when they file their tax returns. As a result, employers may want to estimate the employees marginal tax rate in arriving at the withholding / gross-up rate. Employees expeceted to have annual taxable wages in excess of $1 million are subject to a 37% witholding rate on such special payment.
If you have questions regarding the implementation of these provisions, please do not hesitate to contact a member of Withum’s International Services Group by filling out the form below.
Author: Bee Tan, CPA | firstname.lastname@example.org