Corrections to 2018 Payroll May Be Appropriate for Payments of Prior Years’ Job Related Relocations

On Friday, September 20, the IRS Issued Notice 2018-75 that gives taxpayers a break on moving expenses.
The tax overhaul, commonly known as the Tax Cut and Jobs Act, that passed Congress last year suspended the rules that allowed an employer to bear the cost of moving an employee on a tax free basis unless it is for an active-duty member of the U.S. Armed Forces.  The new rules appeared to apply to work-related moving expenses based on the date the expenses were paid by the employer. The statutory language states that the exclusion from income tax “shall not apply to any taxable year beginning after December 31, 2017, and before January 1, 2026.”

However, Notice 2018-75 softens the application and provides that qualified moving expenses incurred in connection with a move occurring prior to January 1, 2018, but which are paid by the employer to the moving company in 2018 or reimbursed to an employee in 2018, are not includible as additional wages to the employee and are not subject to either federal income or employment taxes.

To qualify for the 2018 exclusion, any reimbursements or payments have to be for work-related moving expenses in connection with a move occurring prior to January 1, 2018, that would have been deductible by the employee if the employee had directly paid the expense(s) before January 1, 2018 and the employee did not deduct the moving expenses. For more information on the 2017 rules, see Form 3903 or Publication 521.


BDO Insights

Employers that have already treated the reimbursements or payments as taxable events in 2018 can follow the normal employment tax adjustment and refund claim procedures outlined in Publication 15, Section 13 or the instructions to IRS Form 941-X.  These procedures generally require the employee’s consent for the employer to recover amounts originally treated as employee withholdings.  Once the consent is received from the employee, the employer will adjust the originally reported taxable wages and tax withholdings on its 2018 payroll tax returns.  If the employee bore the cost of the tax withholdings then the employer would return the over-withheld amounts to the employee. If the employer paid the taxes to the IRS on behalf of the employee and grossed-up the employee’s taxable income to prevent the employee from having out-of-pocket costs on the relocation requested by the employer, the employer will retain the overpayments.  

Also, employers should inquire as to whether the employee deducted the qualifying moving expenses on their 2017 Form 1040 in anticipation of the tax law change.  The payment or reimbursement of previously deducted expenses cannot be excluded from taxable income under Notice 2018-75.