Tax Implications of Relocation Allowances

Relocating for work can be a stressful experience, and it's important to understand the tax implications of a relocation allowance. Generally, relocation expenses are only tax-free if the employee's home is a considerable distance from the new workplace. Only expenses that are on the list of eligible relocation expenses can be reimbursed without tax. A one-time payment is when an employer provides the employee with cash or a check to cover the cost of their relocation in advance.

It is the employee's responsibility to pay taxes on the money they receive, since it is classified as additional income in addition to their salary. In practice, most relocation costs will be incurred close to the time of relocation, so time constraint will generally not be a difficulty. The purpose of this requirement is to establish a limit to prevent expenses from being attributed to the relocation a few years later, when that expense would not influence the employee's decision to move. Employers often offer relocation reimbursement expenses and bonuses as part of work relocation packages.

The IRS considers relocation expenses paid as taxable income, meaning it can require employees to pay relocation taxes. Income tax on relocation allowance is exempt from certain taxes that arise due to additional expenses incurred by relocation to a new location. Pre-relocation spending is quite feasible given the various preparations that a relocation may entail. As reimbursement, an employee covers the relocation himself and the company returns the money to him once the relocation is complete.

While employers are not legally required to provide tax revenues, many companies rely on their competitive relocation packages to garner great talent. Newly relocated employees should interact with their company to ensure they won't have to fund additional tax costs. If this is the case, some companies may consider offering a gross tax estimate as part of the relocation benefit package. Section 91AAR () sets out the factors that the Commissioner may take into account when considering whether a type of expense necessarily arises from the relocation of an employee rather than being costs, including capital costs, that would have been incurred gradually over time, regardless of whether employee had moved.

Employers must adopt relocation reimbursement policies that take advantage of available tax benefits while offering reasonable, equitable and fair relocation programs for their valued employees. The specific tax impact on an employee moving depends on their tax category and place of residence, but the amount an employer pays in relocation expenses, either directly on behalf of the employee or on their behalf, is added to the employee's W-2 form for the year. It is important for employers and employees alike to understand how taxes are applied in order to ensure compliance with all applicable laws and regulations.