When you're the person handling the details of employee relocation for your company, there are a lot of things that you need to know and keep straight. It's a big job. Along with your company's internal policies regarding relocation, you need to be aware of federal regulations -- for instance, how do the moving expenses affect your employee's and your company's tax situations? There's a lot to think about. Following are a few of the things that you'll need to keep in mind.
Moving Expenses are Income
Is it your company's practice to pay a relocating employee a lump sum bonus to incentivize relocation and help with expenses? If so, you should know that this money is considered income to the employee, and will be taxed accordingly. It's important that you make this clear to the employee, so that they don't make any detrimental mistakes when claiming their income for the year. The last thing that you need is for a valuable employee to be tied up with tax problems.
You should calculate the amount of money that your employee is going to have to pay out in taxes, so that you're sure of what the final amount is that they'll have to use on the move. If it's significantly less than the amount that your employee needs to make the move, your company may want to consider grossing up the payment - that is, adding enough money to the bonus to cover the estimated taxes on the income. That way, your employee will get more of the money meant to help them with the move.
You should also remind your employee that any moving expenses not covered by your company may be deductible on their taxes. Being aware of their ability to take a deduction for their out-of-pocket moving expenses can ease some of the pain of an expensive move.
Understanding the regulations will keep your company on track at tax time.
Not only do you need to be aware of your employee's tax obligations when it comes to moving expenses, you also need to know how the company has to proceed when it comes to moving expenses. For the most part, money that your company spends to help an employee move is tax deductible for the company. Relocation expenses are considered ordinary and necessary business expenses.
The tricky part is figuring out payroll taxes and withholdings. Some expenses, like temporary housing and home selling services, will need to be counted as income for the employee and included on the employee's W-2, and payroll taxes must be withheld from that amount.
However, other expenses, like the cost of moving household goods or transportation to the new location, do not need to be added to the employee's W-2. This is because those expenses would most likely be deductible if included on the employee's W-2. If your company does decide to report them as income for the employee, payroll taxes don't have to be deducted from those expenses. It's important to know the difference so that tax season can go smoothly for everyone.
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