Whether relocating employees to another state or overseas, employers often pay for all or part of the expenses associated with the move. Costs covered by the employer usually include packing, the transport and unpacking of household goods, transport of the employee and family to the new location, and temporary living expenses. As the employer, there are options for compensating for these expenses and IRS rules that identify which expenses are eligible.
An employer has a couple of different options available to them on how to treat moving expenses:
Method #1 – Compensation
An employer can pay the employee for moving expenses and treat it as compensation. The amount would be fully includible in the employee’s W-2 for income and social security tax purposes. The employer would deduct the payment as compensation. The employee would then be able to claim a moving expense deduction on their 1040, using Form 3903 Moving Expenses, for the qualified moving expenses they incur.
Method #2 – Expense Reimbursement
An employer can reimburse employees for qualified moving expenses. Qualified moving expenses are not included in the employee’s gross income for income or social security tax. The employee must be accountable to the employer for the expenses. This means that the employee must provide a detailed list of the amounts they are requesting reimbursement for and supporting documentation/receipts (this is considered an accountable plan).
The employer can give the employee an advance on the moving expenses for reasonably expected moving expenses. However, the employee must account to the employer for the qualified expenses. Any excess must either be returned to the employer or included as compensation in the employee’s wages.
Qualified moving expenses
Moving household goods and personal effects from the former residence to the new residence which include:
- Direct shipping expenses
- Fees paid to professional movers
- Import or excise fees imposed on the transportation of goods
- Cost of in-transit storage of goods and effects (limited to a 30 consecutive day period after the removal of the items from the prior residence and before their arrival at the new residence)
- Cost of insuring goods and effects, which are being moved, or which are in in-transit storage. (Note: losses on goods damaged or lost during the move are not deductible as moving expenses)
- Qualified moving costs include pre-move expense of preparing the goods and effects for shipment and the post-move expenses of unpacking the belongings and reading them for personal use in the new residence
Traveling, including lodging but not meals, from the former residence to the new place of business.
The taxpayer and members of their household may deduct one trip from the former residence to the new residence. (The members of the household do not have to travel at the same time)
Lodging and transportation costs incurred en route are deductible (but expenses for meals are not)
Non-Qualified Expenses
- Living expenses incurred while waiting to occupy the new residence or waiting for household furnishings to arrive
- House-hunting and apartment-hunting expenses
- Expenses of trips to the locale from which the taxpayer moved that are made to sell property
- Costs borne by the taxpayer in visiting his family at the former residence before the family’s move
- Expenses incurred to refit rugs or draperies to the residence do not qualify
