October 23, 2018 —While taxpayers continue to adjust to the sweeping tax reform that went into effect with the Tax Cuts and Jobs Act, the IRS continues to work through the policy changes to provide clarity and guidance. One such example involves workers who were reimbursed by their company for moving expenses incurred in 2017 due to job requirements. Companies with employees who were reimbursed in 2018 for those moving expenses will need to take a closer look to ensure they were not treated as taxable income.
Prior to the Tax Cuts and Jobs Act, companies could reimburse employees for qualified moving expenses as nontaxable compensation under the fringe benefit rules as long as the move was qualified and met certain criteria. This generally occurred when an employer moved an employee from one base location to another or required the employee to move to begin a new job.
Section 11048 of the Tax Cuts and Jobs Act suspends the exclusion of qualified moving expense reimbursements from employees’ income for tax years beginning after December 31st, 2017, and before January 1st, 2026. This means any moving expense reimbursement—whether made directly to the employee or directly to a 3rd party for an employee’s move—will be treated as taxable compensation to that employee. The law still allows the exclusion for members of the U.S. Armed Forces on active duty who move because of a permanent change of station, however.
The IRS recently released Notice 2018-75 providing updated guidance for employer payments or reimbursements in 2018 for employee qualified moving expenses that were incurred before January 1, 2018. These specific payments may still be eligible to be excluded from the employees’ wages for income and employment tax purposes.
To qualify, the payments must be for work-related moving expenses that would have been deductible by the employee if the employee had directly paid them prior to January 1st, 2018. Also, the employee must not have already deducted them in 2017.
Since we are within sight of the end of the 2018 tax year, many employers have adopted the removal of this fringe benefit enacted by the Tax Cuts and Jobs Act as of January 1st, 2018. However, they will need to reevaluate any qualified moving expense payments reported as income in 2018, but that meet the criteria as 2017 expenses. Employers that need to make corrections because they withheld and paid federal employment taxes on the qualified moving expenses may use either the adjustment process or the refund claim process to correct the overpayment of federal income tax and employment taxes on these amounts. The adjustment for federal income tax must occur before January 1st, 2019. See IRS Publication,
In summary, this IRS notice only applies to moving expenses incurred before January 1st, 2018 for a qualified move; any moving expenses incurred within the period from January 1st, 2018 through December 31st, 2025 are considered taxable compensation to the employee at the federal level. Employers should also look into state requirements regarding treatment of moving expense payments for state income tax purposes. Not all states conform to the current federal Internal Revenue Code, and there may be exceptions to this rule among individual states.
If you have any questions about this topic or other payroll tax questions, please contact Heather Larson at hlarson@redpathcpas.com or 651-255-9324.