Prepared by Worldwide ERC® Tax Counsel, Peter K. Scott
Peter Scott Associates
Current as of January, 2017
This memorandum discusses the handling of withholding/employment taxes on advances made to relocating employees to cover payment of relocation expenses such as the employees’ home purchase expenses in their destination location.
Lump sums given to employees to cover relocation expenses are ordinarily fully taxable at the time given to the employee, and subject to withholding and payroll taxes at that time.
If the lump sum is in the nature of an advance, and the employee is eventually required to account to the employer for actual expenses, it might be argued that the advance is not treated as wages until the employee accounts to the employer, provided that the employee accounts to the employer within a reasonable time. See section 1.82-1(a)(2) of the regulations, which says that advances for moving expenses are not added to income until the employee accounts for actual expenses if the accounting is within a reasonable time, and PLR 9313015 (April 2, 1993).
However, these authorities, which predate the changes to the moving expense rules in 1993, and the enactment of the “accountable plan” rules, should be considered superseded. The so-called “accountable plan” rules apply to advances for both deductible employee business expenses and excludable moving expenses (such as moving the household goods). Under those rules, moving expense advances are not excludable unless the employee accounts to the employer within a reasonable period of time, and also returns any excess of the advance over substantiated expenses within a reasonable time. Section 1.62-2(g) says that in both contexts a “reasonable time” depends upon the facts and circumstances, but provides a safe harbor. Under the safe harbor, if substantiation occurs within 60 days after the expense is paid or incurred, or an excess amount is returned to the payor within 120 days after an expense is paid or incurred, those times are presumptively “reasonable.” However, other time periods may also be “reasonable” depending upon the specific facts.
IRS Publications 463 and 521 make clear, unfortunately, that advances not meeting the accountable plan rules are taxable immediately, and that advances that include nondeductible expenses do not meet those rules. Consequently, unless an advance for moving expenses covers only deductible expenses, it is taxable in its entirety when made. If it does cover only deductible expenses, and the employee is required to account for actual expenses within a reasonable time, and return any excess over actual expenses, it is not taxable.
Generally, if the employee does not account or return any excess within a reasonable period, the entire advance would be includable in income and subject to withholding/employment taxes at that time. Consequently, if an arrangement covering only deductible moving expenses provides for an accounting within some period of 60-120 days, there should be no tax consequences until after the employee actually does the accounting. However, after that period, unless there are special circumstances justifying the delay, the advances should be considered wages in their entirety at that time. And lump sums covering both deductible and nondeductible expenses should be considered immediately taxable even if accounting is required.