What expense category is Employee Relocation Costs?

To attract top talent or fill a position at a different location, businesses often offer to pay for an employee's relocation expenses. The costs an employer pays to move an employee and their family are a deductible business expense for the company.

However, recent tax law changes have significantly altered how these payments are treated for the employee. For accountants and business owners, understanding these changes is critical for ensuring proper payroll processing and tax compliance. This guide will clarify how to categorize employer-paid relocation costs and the important tax rules that now apply.

Employee Relocation Costs Category

From the employer's perspective, the costs incurred for relocating an employee are a deductible business expense. Because these payments are now generally considered taxable income to the employee, they are best categorized as Wages.

These costs are part of the employee's overall compensation package for the services they will perform for your business.

Important Considerations When Classifying Employee Relocation Costs

The most critical factor for employers to understand is the current taxability of these payments for their employees.

Relocation Costs Are Now Taxable Wages for Most Employees

The Tax Cuts and Jobs Act of 2017 suspended the moving expense deduction for most individuals. A direct consequence of this change is that any moving expenses an employer pays or reimburses are now considered taxable income to the employee.

This means you, the employer, must:

• Include the total value of the relocation payments (whether paid to the employee or directly to a moving company on their behalf) in the employee's gross income.
• Treat these payments as wages subject to federal income tax withholding, social security, and Medicare taxes.

The Military Exception

IRS Publication 463 notes a key exception to this rule. The suspension of the moving expense deduction does not apply to active-duty members of the U.S. Armed Forces who are moving due to a permanent change of station.

Tax Implications and Recordkeeping

For the employer, the costs are deductible; however, they must be reported as part of the payroll.

How to Report the Deduction

For a sole proprietor filing a Schedule C (Form 1040), employer-paid relocation costs are included in the total for Part II, Line 26, Wages, because they are now treated as taxable compensation to the employee.

What Records to Keep

You must maintain detailed records of all relocation expenses paid. This includes:

• The contract or invoice from any third-party moving company.
• Receipts submitted by the employee for any reimbursed expenses.
• Proof of payment for all related costs.
• Payroll records showing that the value of the relocation benefits was included in the employee's Form W-2 wages and that appropriate taxes were withheld.

How Fyle Can Automate Tracking for Employee Relocation

Fyle helps you manage and document all the moving parts of an employee relocation, ensuring every cost is captured and correctly processed through payroll.

• Centralize Mover Invoices: Have your moving company email their invoice so they can be forwarded directly to Fyle for automatic data capture.
• Track Employee Reimbursements: Employees can easily submit their receipts for reimbursed moving costs through the Fyle mobile app.
• Create a Clear Audit Trail: Fyle keeps all moving contracts, invoices, and employee receipts together in one organized digital record.
• Automate Your Accounting: Sync categorized relocation costs to your payroll system to ensure they are included as taxable wages on the employee's W-2.