Relocation, USA

12 April 2018

This article was featured in the May 2018 issue of the magazine.

Llatisha O’Neal CPP, payroll supervisor at Bama Companies Inc, and a member of the APA’s board of contributing writers explains how to determine if relocating employees is a qualified move

Relocating employees is commonplace in the business world. Therefore, accounting for the taxable and nontaxable income of the employee being relocated would seem to be a simple process, but that isn’t always the case. There are so many moving parts (pun intended) to the process. In short, payroll professionals need to step back and look at all the aspects of a big move. 

The first thing to determine is whether relocating an employee would be considered a ‘qualified move’, according to the U.S. Internal Revenue Code (‘the Code’) and Internal Revenue Service regulations (‘the regulations’). To make the determination, payroll professionals should review whether the move meets the ‘distance and time’ tests. For distance, the Code says the new workplace must be at least fifty miles farther from the employee’s old residence than the previous workplace was. For example, if the employee lived fifteen miles away from his or her former workplace, the new workplace must be at least 65 miles away from the employee’s old residence to be considered a qualified move.

Regarding time, the regulations state that the employee is expected to be at the new location for at least 39 weeks of the next twelve months. Both distance and time tests must be satisfied for the move to be a qualified move and eligible for nontaxable payments or reimbursements.

If the relocation of the employee is determined to be a qualified move, the payroll department will need to gather all the information about the expenses that relate to the relocation. The information may be housed in a variety of different areas such as payroll, accounts payable, human resources, legal, or with outside vendors, etc. Once all the expenses have been gathered, payroll needs to put the information into different categories for taxation and reporting.


...step back and look at all the aspects of a big move


The next step is to separate the amounts considered qualified moving expenses, which are not taxable income to the employee. There are two basic types of qualified expenses:

  • moving of the household items – the employer can pay for the packing and shipping of household goods, including thirty days of storage

  • moving of the employee and family – the employer can pay for the travel of the employee and family to the new location. The travel can be in airfare, hotel, and/or mileage. Meals are not considered qualified and would be taxable income if paid by the company.

Any other cost that is paid or reimbursed by the company is not considered a qualified moving expense and would therefore be taxable income to the employee. Some examples of nonqualified expenses are closing costs, house-hunting trips, temporary housing, realtors’ fees, and school registration fees. A nonqualified expense would be subject to federal income tax withholding, social security, and Medicare taxes.

The final step is to look at the expense to see if it is reportable in Form W-2. If the expense is nontaxable and paid by the company, it is not reportable in the form. If the expense is nontaxable but was paid by the employee and then reimbursed by the company, then it would not be included in boxes 1, 3, or 5, but would be reported in the Form W-2 in box 12 with code P. Any expense that is taxable income would be included in boxes 1, 3, and 5 of Form W-2 with the appropriate withholding in boxes 2, 4, and 6. 

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