Prepared by Worldwide ERC® Tax Counsel, Peter K. Scott
Peter Scott Associates
July, 2005
I. GENERAL RULES OF MOVING EXPENSES
The Revenue Reconciliation Act of 1993 substantially changed the moving expense deduction effective for expenses incurred after December 31, 1993 .
The principal changes eliminated any deductions for meals, househunting, temporary living, and buying or selling a residence; changed the distance requirement from 35 to 50 miles; and permitted an exclusion from income for reimbursed, deductible expenses, with any unreimbursed, deductible expenses deducted by the employee "above the line" rather than as an itemized deduction.
The Employer’s Perspective
1. The employer’s deduction
Generally, amounts the employer expends to facilitate the employee’s job-related move are deductible as ordinary and necessary business expenses. The employer may deduct such expenditures whether or not they are characterized as compensation to the employee, and whether or not they are paid directly to the employee.
2. Payroll taxes and withholding
a. Determination of liability.
Generally, the employer is liable for collecting and paying payroll taxes and withholding on moving expense reimbursements and other payments determined to be income to the employee. However, the employer is not liable for payroll taxes and withholding on amounts excluded from the employee’s income (i.e, deductible moving expenses), or if it is reasonable to believe that a corresponding moving expense deduction is allowable to the employee. The deduction’s being "allowable" should be taken to mean only that the deduction is of a type that would be allowable to a hypothetical employee who met all the requirements for the deduction, and not necessarily that the particular employee actually will take the deduction.
b. An example:
The employee incurs $10,000 in moving expenses, consisting of $5,000 for moving household goods, $1,000 for transportation at the time of the move, $1,500 in temporary living expenses at the new location, and $2,500 in home selling and purchase expenses. The employer reimburses the employee for all the expenses. The employer must include the latter two amounts (totaling $4,000) in the employee’s W-2, and must withhold and pay payroll taxes on that amount. The employer does not include $6,000 as taxable wages on the W-2, and does not withhold or pay payroll taxes on that amount. Alternatively, the employer may choose to include the $6,000 as taxable wages. If it is does so, it still need not withhold or pay payroll taxes because it is reasonable to believe that the employee will have a deduction for the $6,000. The employee will then take an offsetting $6,000 deduction on his or her tax return.