Effective Date: 07/01/05

Payment and Taxation Requirements for Employee Moving Expenses 

It is the policy of the State of North Carolina to comply with all applicable federal and state regulations regarding the payment and taxation of employee moving expenses.

State Budget Manual - Personnel Policies and Regulations Section

IRS Publication 521

The following requirements are imposed by the Internal Revenue Service:

Reimbursements included in income.  An employer must include in the employee's income any reimbursements made (or treated as made) under a nonaccountable plan, even though they are for deductible moving expenses.  An employer also must include in gross income as wages any reimbursements of, or payments for, nondeductible moving expenses. This includes amounts the employer reimbursed the employee under an accountable plan for meals, househunting trips, and real estate expenses. It also includes reimbursements that exceed the employee's deductible expenses and was not returned to the employer.

Reimbursement for deductible and nondeductible expenses. If an employer reimburses an employee for both deductible and nondeductible moving expenses, the employer must determine the amount of the reimbursement that is not taxable and not subject to withholding. The employer must treat any remaining amount as taxable wages and withhold income and FICA  tax.

Amount of income tax withheld. If the reimbursements or allowances received by the employee are taxable, the amount of income tax the employer will withhold depends on several factors. It depends in part on whether or not income tax is withheld from regular wages, on whether or not the reimbursements and allowances are added to regular wages, and on any information provided by the employee on Form W-4, Employee's Withholding Allowance Certificate.

Qualified moving expenses paid to a third party, such as a moving company, on behalf of the employee, and services furnished in kind to the employee will not be reported on the W-2.  Qualified moving expense reimbursements an employer pays directly to an employee will be reported in Box 12 of Form W-2 and identified using Code P. All non-qualified (taxable) moving expense will continue to be included in wages in Box 1 of Form W-2, whether or not paid directly to a third party. Payments for these expenses are subject to income and FICA tax withholding.

The following is a clarification of which moving expense reimbursements made under the State's Budget Policy are subject to inclusion in the employee taxable wage and which payments are not considered compensation. The agency must take care not to tax employees for State subsistence at the new duty station when the facts and circumstances indicate that the employee's old dwelling had not been abandoned and the employee's living expenses are being duplicated so that it could be argued that the employee was traveling away from home overnight. Expenses for travel while away from home on business overnight are not taxable to the employee if the expense substantiation rules are followed. The tax treatment of travel while away from home on business is set forth in IRS Regulation 1.162-2(f). A short discussion of these rules is included so that agencies can make a more informed determination of when to tax the 40 business days of subsistence payments that are available under the State's moving expense reimbursement policy.

The Accounts Payable section of an agency is responsible for paying moving expenses and determining the tax status of such payments. When the expenses are paid, the Accounts Payable staff must submit to the Central Payroll Division one of the following forms which identify all taxable and nontaxable amounts paid to an employee as moving expenses:

• Form OSCPXA 05, Employee Moving Expense (Nontaxable) Worksheet
• Form OSCPXA 11, Employee Moving Expense (Taxable) Worksheet

Forms are available at:

http://www.ncosc.net/sigdocs/sig_docs/payroll/Payroll_Forms.html

Nontaxable Expenses

The agency Payroll Office submits a copy of Form OSCPXA 05, Employee Moving Expense (Nontaxable) Worksheet to the Central Payroll Division on quarterly basis. The Central Payroll Division enters nontaxable payments to the system so that deductible expenses are represented on the employee's W-2 form at year end. These expenses are reported in Box 12 of Form W-2 and identified using Code P. All non-qualified (taxable) moving expense will continue to be included in wages in Box 1 of Form W-2, whether or not paid directly to a third party. These are subject to income and FICA tax withholding. 

Taxable Expenses

Taxable moving expenses are included as additional salary in the employee's next payment.    If the employee has separated from the agency, the amount of salary reported is "grossed up" to accommodate the tax withholding. Form OSCPXA 11, Employee Moving Expense (Taxable) Worksheet, should be submitted to the agency payroll office.

The process for recording taxable moving expenses for a current employee involves the following:

• Expenses are added to the employee's gross wages and are recorded against account 531660, Taxable Employee Expense Reimbursement.
• The expenses are taxed according to the employee's W-4 and NC-4 elections.
• The expenses are not subject to retirement contribution.
• The amount of the expense is added as a deduction using deduction code 056, Moving Expenses (Taxable).  Note: The deduction code must be manually removed before the employee's next payment.

If the employee has separated from the agency and is not eligible for any pay, the amount of salary entered into the Central Payroll System must be "grossed up" to ensure the net pay amount is zero.  The calculation for the gross salary amount follows:

* Calculation based on 100% cost less 7.65% current FICA rate = 92.35%

The calculation should be verified by multiplying the gross salary amount by 6.2% for OASDI and 1.45% for HI and then adding the two products.  When added, the result must equal the difference between the gross salary amount and the deduction amount. This verification allows for any rounding differences that may result during the payroll processing cycle. 

Once the gross salary amount is determined, the reimbursement is processed as follows:

• The gross salary amount is recorded against account 531660, Taxable Employee Expense Reimbursement.
• The expenses are taxed at the flat tax rate (See section D.02 Current Year Payroll Processing Rate Table for current rates.)
• The expenses are not subject to retirement contribution.
• The amount of the expense is added as a deduction using deduction code 056, Moving Expenses (Taxable).

When the payroll is processed, the Central Payroll Division remits a paper check for the amount of the 056 Moving Expenses (Taxable) deduction to the agency to reimburse the original Accounts Payable payment to the employee.  The agency must receipt the deposit of the reimbursement against account 532950, Employee Moving Expenses.

Internal Revenue Code Section 2

17 allows a deduction for moving expenses paid or incurred during the taxable year in connection with the commencement of work by the employee.  Moving expenses are defined as the reasonable cost of moving household goods and personal effects from the former residence to the new residence, and of traveling from the former residence (including lodging, but not meals) to the new residence.

No deduction is allowed for moving expenses unless the employee's new principal place of work is at least 50 miles farther from his former residence than was his former place of work, or if he had no former principal place of work, is at least 50 miles from his former residence.  Also, the employee must be a full-time employee at the new general location for at least 39 weeks following the start of work at the new location, or during the 24 month period immediately following his arrival in the general location of his new principal  place of work, he is a full-time employee or is self employed during at least 78 weeks, of which not less than 39 weeks are during the 12-month period referred to previously. The 50 mile or 39 week rule does not apply if the employee is unable to satisfy the conditions due to death, disability or involuntary separation.

In general, the move must occur in connection with the commencement of work at the new location and must be incurred within one year from the time the taxpayer begins work at the new location. Moving expenses may be deductible after this one-year period if the taxpayer can show that circumstances prevented the taxpayer from incurring the expense of moving within the one-year period.

Qualified moving expenses under Code Sec. 132(g) are excludable from the gross wages and wages for income and employment tax purposes to the extent paid for or reimbursed by the employer, whether paid for directly or through reimbursement.  The employer is required to treat the qualified moving expenses as excludable from wages unless he has actual knowledge that the employee deducted the qualified expenses in a prior year or will not meet the distance requirement or the 39/78 week test.

For travel expenses to be excludable from the employee's income, they must be incurred while, (1) away from home, (2) and in pursuit of a trade or business. IRS Regulation 1.162-2(f) sets forth three objective factors that are to be used to determine if an individual's home is truly his tax home.  The factors are:

1. whether the individual performs a portion of his business in the vicinity of the abode while he is using the abode for lodging;
2. whether the individual's living expenses are duplicated because his business requires him to be away from the area; and
3. whether the individual has (a) not abandoned the vicinity in which his historical place of lodging and his claimed abode are both located, (b) has a member of his family currently residing at the claimed abode, or (c) uses the abode frequently for purposes of lodging

If the individual satisfies all three of the above criteria, the individual's abode will be treated as his tax home.  If the individual satisfies two of the three criteria, then all the facts and circumstances will be considered in determining if the claimed abode is the tax home.  If at least two of the three criteria are not satisfied, the individual will be classified as an itinerant who has a tax home wherever he works. Since an itinerant never leaves his tax home, he is not entitled to deductions for travel expenses. Conversely, any employer reimbursement of travel expenses would be includable in the employee's wages, subject to employment taxes. When employees work away from home it is sometimes impractical for them to return home at the end of the work day. When this occurs, the employee's travel expense reimbursements  (meals and lodging) are not taxable if the period of work away from home is temporary.  Should the period of work become indefinite, travel expenses are considered compensation because the employee is considered to have changed the location of his tax home to his work location. Any employment that actually exceeds one year is treated as indefinite. The inclusion in income applies to all expenses reimbursed, not just those reimbursed after one year.

North Carolina General Statute 138-8 authorizes the Office of State Budget and Management (OSBM) to set a policy for the reimbursement of State employees who are required to relocate their duty station, when that relocation is deemed to be in the best interest of the State. That policy, as it presently exist, conflicts in several instances with what is allowable under the Internal Revenue Code. It is important to note that the definition of taxable versus non-taxable moving expenses, per the IRC, has changed numerous times. Also, how the moving expenses are to be reported for Form W-2 purposes has changed three times since 1993; the most recent change became effective January 1, 1998.

OSBM policy allows for the movement of household and personal goods. The weight limitations stated in that policy are not found in the IRC, so that additional cost borne by the employee in connection with the household move should be allowable as an itemized deduction to the employee on his/her tax return.  The tax treatment of insurance, appliance connections, mobile home set up cost, etc. per OSBM policy would normally not be taxable compensation since it would qualify as moving household goods (personal property), unless other IRC requirements for the move are not met by the employee.

OSBM policy allows for travel and subsistence to the employee for the cost of travel in locating a new residence for a maximum of three trips at the statutory rate (presently $.325/mile for round trips under 60 miles and $.22/mile in excess of 60 miles. The IRC does not allow the reimbursement of travel for house-hunting purposes. The house-hunting mileage reimbursement is taxable compensation to the employee. Subsistence and lodging paid while looking for a new home is taxable compensation to the employee.

For the day of the move, OSBM policy allows for mileage, subsistence for meal cost for each family member, and overnight lodging. The IRC does not allow for the tax free reimbursement of meal expenses incurred while moving. Therefore, all meal subsistence reimbursements for the day of the move is taxable compensation to the employee. Mileage paid in excess of the $.15/mile (moving mileage rate) would also be taxable compensation. The overnight lodging reimbursement is not taxable income.

OSBM policy allows for the payment of subsistence at the new duty station for a period not to exceed five days a week and mileage for one-round trip per week from the employee's current residence to the new duty station, not to exceed 40 business days. IRC Section 217 rules require that all per diem reimbursements be included in the taxable wage of the employee, subject to employment taxes. While the general rule of Section 217 is that payments of subsistence will be taxable compensation to the recipient, IRC Regulation 1.162-2(f) (see above) sets forth criteria that must be met in order to exempt business travel expenses from taxable wages. When at least two of the three stated criteria are met by the employee, for instance where the employee's living expenses are duplicated and family members are still living in the claimed abode, it is our opinion that the facts and circumstances would indicate that the employee, for IRC purposes, would qualify for being in overnight travel status and the subsistence would be a non-taxable fringe benefit, excludable from taxable wages under IRC 132(g). When two of the three Reg. 1.162-2(f) criteria are no longer being met, the subsistence for the 40 business days would be taxable compensation.  This is also true for the one-round trip mileage reimbursement. Please note, the applicable mileage rate for overnight travel while on business is $.405/mile for 2005, not the $.15/mile moving mileage rate.

This policy applies to all State entities.

There are no exceptions to this policy.

• Accountable Plans
  To be an accountable plan, an employer's reimbursement arrangement must require you to meet all three of the following rules.
  
  1. The employee's expenses must be of the type for which a deduction would be allowed had they paid out of pocket. The reasonable expenses of moving the employee's possessions from the former home to the new home and traveling from the former home to the new home are two examples.
  2. The employee must adequately account to the employer for these expenses within a reasonable period of time.
  3. The employee must return any excess reimbursement or allowance within a reasonable period of time.
  
  If an employee's reimbursement meets the three rules for an accountable plan, the employer should not include any reimbursements of expenses in the income in box 1 of the Form W-2. Instead, the employer should include the reimbursements in box 12 of the employee's Form W-2.

• Nonaccountable Plans
  A nonaccountable plan is a reimbursement arrangement that does not meet the three rules listed under Accountable Plans.
  In addition, the following payments will be treated as paid under a nonaccountable plan.
  
  1. Excess reimbursements the employee fails to return to the employer.
  2. Reimbursements of nondeductible expenses.
  
  If an arrangement pays for an employee's moving expenses by reducing their wages, salary, or other pay, the amount of the reduction will be treated as a payment made under a nonaccountable plan. This is due to the employee being entitled to receive the full amount of their pay regardless of whether they had any moving expenses.