What expense category is Employer-Paid Outplacement Services?

When a business undergoes restructuring or layoffs, providing outplacement services is a supportive way to help former employees transition to new careers. These services, which can include career counseling, resume assistance, and skills assessment, are a common cost associated with workforce changes.

For accountants and business owners, it is important to know that the fees paid for these services are a deductible business expense. This guide will clarify how the IRS categorizes these costs, outline the important rules to follow, and provide guidance on tracking these expenses for accurate tax compliance.

Outplacement Services Expense Category

The costs of outplacement services that you provide to your employees are an ordinary and necessary business expense. IRS Publication 535 lists Outplacement services explicitly as a deductible cost.

There is no single, dedicated line item for these fees. Instead, they are typically categorized based on the nature of the cost.

• If you pay a third-party firm for these services, the fees would be deducted under Other expenses on your business tax return (e.g., Schedule C).
• If you provide the services in-house, the individual costs are deducted in their respective categories (e.g., rent for the space used, utilities for phone calls).

Important Considerations When Classifying Outplacement Services

While the fees are deductible for the employer, the primary consideration is the tax impact on the former employee.

Tax Treatment for the Employee

The value of outplacement services is a key area of focus. While the provided IRS documents confirm the employer's deduction, they also reference other publications (like IRS Pub 15-B) for rules on whether the value of these services must be included in an employee's income. 

Generally, if you provide these services to help your employees find new employment, they may be treated as a tax-free fringe benefit. However, employers should consult the specific IRS rules on fringe benefits to ensure compliance with these regulations.

What Services Qualify?

Publication 535 lists several examples of services that fall under the umbrella of outplacement, including:

• Career counseling
• Resume assistance
• Skills assessment

Any costs directly related to helping your employees secure new employment are generally included.

Tax Implications and Recordkeeping

To deduct the cost of outplacement services, you must report them correctly and maintain the required documentation.

How to Report the Deduction

For a sole proprietor filing a Schedule C (Form 1040), fees paid to an outplacement firm are deducted under Part II, Line 27a, Other expenses. List them with a clear description, such as Outplacement Services.

What Records to Keep

You must have documentary evidence to substantiate the expenses. Your records should include:

• The contract or service agreement with the outplacement services provider.
• Invoices from the provider detailing the services rendered and the fees charged.
• Proof of payment, such as canceled checks or credit card statements.
• Records showing which employees were offered or received the services.

How Fyle Can Automate Tracking for Outplacement Service Fees

Fyle helps you manage and document payments to outplacement firms, ensuring every cost is captured and ready for tax time.

• Centralized Invoices: Have your outplacement provider email invoices directly to Fyle for automatic data capture and organization.
• Track by Department: If layoffs affect a specific department, code the outplacement costs accordingly for internal reporting.
• Create a Clear Audit Trail: Fyle consolidates the service contract, invoices, and proof of payment into a single digital expense record.
• Automate Your Accounting: Sync the categorized expense directly to the correct GL account in QuickBooks, Xero, NetSuite, or Sage Intacct.