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EMPLOYER TAX BRIEF
Employers must approach relocation benefits carefully
Employers need to consider every angle to attract top talent in today’s challenging skilled labor market.
If your organization is open to hiring regionally, nationally or even internationally, offering relocation benefits can demonstrate your commitment to employees’ well-being and enhance their onboarding experience. However, there are financial and tax implications to consider.
Budgeting matters
The purpose of relocation benefits is to ease the financial, logistical and mental-health strain of moving for a new hire. They can range from simple cash payouts to a lavish array of perks most often reserved for top executives.
When choosing which benefits to offer, establish a firm budget. Generally, employers cover moving services and transportation, such as airfare. But you might want to cover other perks, including packing and unpacking services, storage expenses, short-term housing, and spousal employment assistance.
The extent to which you should consider relocation benefits may depend on your industry. Your offerings must legitimately compete with those of rival employers casting their lines into the same hiring pool. Otherwise, you probably won’t gain the hiring edge you’re looking for.
A little tax history
Currently, payments for relocation expenses are deductible for the employer but taxable to the employee, similar to how bonuses are generally treated. But it hasn’t always been this way.
Before the Tax Cuts and Jobs Act (TCJA) of 2017, how moving expenses were reported and taxed depended on the type of plan that an employer used. “Accountable” plans, which followed certain IRS rules, allowed employers to fully deduct payments while employees weren’t subject to taxation, including payroll tax. This made such plans highly favorable from a tax perspective, though they required more administrative effort.
Under a “nonaccountable plan,” pre-TCJA relocation payments were treated similarly to how a bonus would be reported and much like how the payments are now treated. That is, they were taxable compensation subject to both income tax and payroll tax. Employees could, however, deduct moving expenses — which substantially mitigated the tax hit.
The TCJA eliminated the moving expense deduction for all employees other than active-duty military members. This provision had been scheduled to sunset after 2025, which could have brought the tax break back to life next year. However, the One Big Beautiful Bill Act, enacted in July 2025, permanently eliminated the moving expense deduction while adding an exception for “intelligence community members.”
Many employees are unpleasantly surprised to discover that moving expenses paid as a relocation benefit are included in their taxable income. One way to counteract the negative tax consequences, if the budget allows, is to increase the total amount of the relocation payment. Often called a “tax gross-up,” the additional amount above the intended payment covers the employee’s tax liability. Alternatively, you could simply forewarn recipients of the tax consequences and discuss the matter with them.
Strategic tool
Under the right circumstances, relocation benefits can be a strategic tool for recruitment, retention and employee engagement. Just make sure such perks are a win-win for both parties before putting them on the table during a hiring negotiation. We can help you explore their feasibility for your organization.