September 24, 2018 IRS announces that certain moving expenses incurred in 2017 are not included in wages subject to withholding and employment tax in 2018 In IR-2018-190 and Notice 2018-75, the IRS announced that moving expenses incurred prior to 2018 but that are reimbursed or paid in 2018 are excluded from wages subject to federal income tax (FIT), federal income tax withholding (FITW), Social Security/Medicare (FICA) and federal unemployment insurance (FUTA) if they were excluded from taxable wages prior to the changes made under the Tax Cuts and Jobs Act (TCJA). This rule also applies to payments made to a third-party in 2018 for moving services provided prior to 2018. To qualify for this exclusion from taxable wages in 2018, the IRS explains that employees must not have deducted the expenses on their 2017 federal personal income tax returns. Background Under the TCJA, reimbursements for moving expenses made to employees or paid directly to third parties on and after January 1, 2018, and through December 31, 2025, are included in wages subject to FIT, FITW, FICA and FUTA. An exception to this provision applies to members of the Armed Forces on active duty moving pursuant to a military order and incident to a permanent change of station. (TCJA Section 11048.) Prior to January 1, 2018, IRC Section 132(g) allowed an exclusion from wages for FIT, FITW, FICA and FUTA purposes under IRC Section 132(a)(6) for moving expenses reimbursed or paid directly by the employer to the extent those moving expenses were deductible under IRC Section 217. Under IRC Section 217, the exclusion applied to the cost of moving household goods and personal effects from the former residence to the new residence, the first 30 days of storage for a domestic move, and lodging and mileage expenses incurred during the period of travel from the former residence to the new place of residence. Special rules applied to foreign moves. Additionally, nontaxable moving expense reimbursements paid directly to employees were reported on Form W-2, in box 12, code P. (See IRS Publication 521 and Form 3903.) Correcting amounts included in wages in 2018 If employers have included moving expense reimbursements or third-party payments in taxable wages in 2018 (for moving expenses incurred before 2018), the IRS states that the normal adjustment procedures apply. Accordingly, if employers act before December 31, 2018, they will be able to refund to employees any federal income or FICA tax withheld on such amounts. Employers claim a refund of FIT and FICA withheld and employer matching FICA contributions by filing Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund, for the quarter in which the moving expense reimbursements or third-party payments were originally reported. A credit to FUTA may also apply and can be taken into account when making the final FUTA deposit for the 2018 fourth quarter. Ernst & Young LLP insights It was unclear if the changes under the TCJA would apply to moving expenses incurred in 2017 but reimbursed or paid to a third-party in 2018. Accordingly, the conservative approach, absent IRS guidance, was to include all reimbursements and payments for moving expenses in taxable wages effective January 1, 2018, regardless of when those expenses were incurred. Notice 2018-75 gives employers the assurance they need to exclude 2018 relocation reimbursements and third-party payments from taxable wages if the moving expenses were incurred prior to January 1, 2018. Keep in mind that not all states conform to the federal rules for moving expenses. Accordingly, employers will need to confirm the treatment of moving expense reimbursements and third-party payments for state income and unemployment insurance tax purposes. Ernst & Young LLP Employment Tax Advisory Services can assist you with this process. For more information on the employer impact of the TCJA see our special report here. ———————————————
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