Employers sometimes cover moving expenses for employees as a hiring incentive or to support a work-related relocation. While this can ease financial strain, it also comes with tax implications that both employers and employees must understand.
Tax treatment of these payments has changed in recent years, affecting how they are reported and whether they count as taxable income. Understanding the rules helps avoid unexpected tax liabilities and ensures compliance with IRS requirements.
Classification of These Payments in Compensation
Payments for moving expenses fall into different categories depending on how they are structured. Some are treated as direct compensation, while others may be classified as reimbursements. This distinction affects how these amounts are reported and whether they are subject to payroll taxes.
If an employer provides a lump sum for relocation costs, the IRS considers it taxable income. Since the employee controls how the money is spent, it is subject to federal income tax, Social Security, and Medicare withholding, even if used solely for moving-related expenses.
Reimbursements do not change this result for most employees during 2018–2025. Except for active-duty Armed Forces moves ordered under a permanent change of station, employer payments or reimbursements of moving expenses are treated as taxable wages during this period. 1Internal Revenue Service. General Instructions for Forms W-2 and W-3 (2025)
Under accountable plan rules, amounts can be excluded from wages only if the arrangement requires business connection, substantiation, and the return of any excess; however, moving expenses generally do not qualify for exclusion for nonmilitary employees while the TCJA suspension is in effect (2018–2025). 2Internal Revenue Service. Nonresident Aliens and the Accountable Plan Rules
Taxation for the Employee
The tax consequences for employees depend on how the relocation payment is structured. Since the Tax Cuts and Jobs Act eliminated the moving expense deduction for most taxpayers through December 31, 2025, employees generally cannot deduct these costs on their personal returns unless they are active-duty members of the Armed Forces moving due to a military order and permanent change of station. 3Internal Revenue Service. Instructions for Form 3903 (2024)
For example, an employee earning $80,000 who receives a $10,000 moving allowance will have their taxable income increase to $90,000. This could push them into a higher tax bracket, increasing their overall tax liability.
To mitigate this, some employers offer tax gross-ups—additional payments to cover the employee’s tax liability on the moving benefit. If an employer provides a $10,000 moving allowance and applies a gross-up, they may pay an extra $3,000–$4,000 to ensure the employee receives the full intended amount after taxes. While this increases employer costs, it prevents employees from facing unexpected tax bills.
Employer Reporting on Pay Documents
Employers must report relocation benefits accurately on employee pay documents to comply with IRS regulations. When an employer provides a taxable moving allowance, it is included in the employee’s gross wages on Form W-2 in Box 1 (Wages, tips, other compensation). Since these payments are subject to payroll taxes, they also appear in Box 3 (Social Security wages) and Box 5 (Medicare wages and tips), with the appropriate withholdings deducted. For 2018–2025, excludable moving expense reimbursements and direct payments apply only to members of the U.S. Armed Forces on active duty moving under military orders; in that case, qualified reimbursements paid directly to the employee are shown in Box 12 with Code P, and qualified amounts paid to third parties are not reported on the W-2. 4Internal Revenue Service. General Instructions for Forms W-2 and W-3 (2025)
If an employer offers a tax gross-up, the gross-up amount is also taxable income, increasing total reported wages. This affects payroll tax calculations and employer tax obligations. Employers must ensure all amounts are properly recorded in payroll systems to avoid discrepancies that could trigger IRS scrutiny.
If relocation expenses are covered through direct payments to vendors—such as a moving company—these amounts are treated the same as reimbursements for most employees in 2018–2025 and are taxable unless the Armed Forces exception applies. Non-taxable direct payments for military moves follow the rules noted above.
Distinguishing Reimbursements from Direct Payments
How an employer provides relocation assistance influences financial reporting and tax treatment. Direct payments occur when an employer pays a third party on behalf of the employee, such as issuing a check directly to a moving company or a temporary housing provider. For most employees in 2018–2025, these direct payments are taxable wages unless the Armed Forces exception applies.
Reimbursements, by contrast, involve the employee paying for moving-related expenses out of pocket and later receiving repayment from the employer. During 2018–2025, reimbursed moving expenses are taxable wages for nonmilitary employees even if the employee submits receipts. If a stipend is provided without requiring proof of expenses, it is also treated as additional wages and subject to withholding.
Documentation and Recordkeeping
Proper documentation ensures compliance with tax regulations and supports any non-taxable reimbursements. The IRS requires detailed records to substantiate exclusions from taxable income, meaning both employers and employees must maintain organized records of moving-related transactions. Employers should establish clear policies on what qualifies for reimbursement and communicate these guidelines before providing relocation benefits.
Employees receiving reimbursements under an accountable plan must submit receipts, invoices, or other proof of expenses, and return any excess advances. If an employee fails to provide adequate documentation or return excess amounts within a reasonable period, the reimbursement may be reclassified as taxable wages. 5Internal Revenue Service. Nonresident Aliens and the Accountable Plan Rules
Employers should retain copies of all submitted documents, along with any agreements outlining relocation benefits, for at least three years in case of an IRS audit. Digital recordkeeping systems can help streamline this process and ensure compliance.