Disclaimer: The views and opinions expressed in this article are solely those of the author and do not necessarily reflect the official policy or position of WERC.
Corporate moves are surging. According to an Atlas Van Lines report, 70% of all companies reported an increase in employee relocations last year. Unfortunately, relocating employees in the U.S. or abroad could require tax obligations that not all HR and mobility professionals are prepared for. What’s more, many leaders often assume their relocation management company (RMC), mobility tax provider, or local payroll provider will automatically handle tax compliance for their domestic and international moves. That’s not always the case. This article will look at the common misconceptions about relocation tax compliance and lay out tips to help your team avoid tax violations and maximize tax savings for moving expenses.
Why Tax Reporting for Relocation Expenses Is Complicated
Taxes for relocation benefits may not be as straightforward as many mobility and HR leaders hope, especially if you’re dealing with international moves. Oftentimes, a corporation will assume their tax-reporting processes for domestic relocation expenses will work internationally. What they don’t always realize is that different countries often follow different tax rules for relocation expenses.
The U.K. is an example that illustrates how subtle differences in law can impact tax reporting. In the U.K., tax authorities set an £8,000 limit on certain relocation benefits that can be paid and excluded from U.K. taxes. That means if your company is considering relocating an employee to the U.K., it is crucial to have a system in place for distinguishing between qualified and nonqualified expenses. Additionally, it is important to monitor qualified expenses that exceed £8,000 to avoid any unforeseen tax liabilities.
Too often, corporate leaders will assume tax rules for international moves automatically mirror those in the U.S. This misunderstanding can lead to tax violations, unexpected costs, or unrealized tax benefits.
U.S. Domestic Challenges
U.S. relocations aren’t safe from tax complications. Here are two challenges to look out for if you’re managing taxes for relocation benefits in the U.S.:
1. Tax laws are scheduled to change.
Before 2018, several moving expenses were tax-deductible for employees who were relocating. However, the 2017 Tax Cuts and Jobs Act eliminated most of those deductions. Although the 2017 law is still active, it’s set to expire—and revert back to the old tax scheme—in 2026. Depending on upcoming political outcomes, as well as Congress’s decisions, the law could either revert back to pre-2018 norms, stay the same, or adjust when the 2026 deadline hits.
2. Mobility tax services may not be tax-free.
International companies often provide tax counseling and tax preparation services to employees in the first year that the employee relocates to the U.S. However, those services may be taxed as part of the employee’s salary. According to a 2017 IRS Chief Counsel Memorandum, tax service benefits for both the U.S. and foreign countries count toward the employee’s gross income in the U.S. This less-known rule can end up leading to unexpected taxes, frustrated employees, and misreported expenses.
Why Third Parties Don’t Always Keep You Tax Compliant
Third-party service providers can be excellent resources during an employee relocation. However, HR and mobility professionals often misunderstand the scope of popular services third parties provide. Here are three types of third-party vendors that are helpful but may not be covering tax reporting in the way you think they are:
Relocation Management Companies
RMCs can be handy if you’re trying to manage relocation benefits within the U.S. However, RMCs usually don’t review or report on tax information for moves abroad. Too often, a corporation will assume that because their RMC handles taxability for moves throughout the U.S., they will take care of taxes on international moves. Because international taxes usually land outside the RMC’s realm of expertise, they may send expense information to payroll—who, in turn, rarely understand how to report it properly.
Mobility Tax Providers
Mobility tax providers can lend significant help to assignees who are receiving relocation benefits. However, their services tend to be limited when they’re working with transferees. By and large, most mobility tax providers won’t automatically monitor how relocation benefits are taxed when they’re working with employees who transfer. Even if the RMC or company provides the mobility tax provider with a report listing all relocation benefits, it should not be assumed the mobility tax provider will then work with the host country payroll teams to analyze the taxability of those items and report in the host country payroll.
Local Payroll Provider
Sometimes a corporation will send a report of relocation benefits to a transferee’s host country, assuming they will handle the rest. However, local payroll departments often aren’t trained to work with tax rules for relocation benefits. This can lead to misreporting or unreported taxes.
Tips to Help Ensure Tax Compliance on Relocation Expenses
HR and mobility professionals can reduce their risk of tax violations by adopting a more proactive stance during relocations. Here are a few tips to help you protect your company and employees from tax setbacks:
1. Create a relocation taxability matrix.
A relocation taxability matrix is a tool that lists the standard relocation items that might be paid for during a move and indicates whether each is taxable or not. However, be aware that it won’t be adequate to rely on a single matrix if your employees work in multiple countries. Because different countries have different tax rules, you’ll need to create a new matrix for every country that employees work in.
Also, be sure to update your matrices frequently. Tax rules and laws change quickly, so it’s important to ensure every matrix is current. Hiring a global tax professional who knows each country’s tax rules may be a good idea.
2. Track all relocation details.
If you want to ensure employees properly report and take advantage of tax benefits, pay close attention to the specifics of the move. The details matter. For instance, permanent transfers and short-term assignees often need to follow a completely different set of rules. Tax reporting obligations, as well as relocation benefits, can vary depending on the relocation country and the length of a relocation assignment.
3. Pay close attention to housing benefits.
Housing benefits can be an especially complicated expense to report on. Everything from the size of housing to the length of your employees’ stay and even how you submit payments can influence relocation tax benefits, particularly for individuals who are on a short- or long-term assignment. Overall, if you’re providing housing for employees, the costs and details deserve a second look.
Stay Proactive to Reduce Tax Risks
Relocation benefits create a high risk of tax misreporting and violations, especially if you’re working with international moves. However, HR and mobility professionals can take steps to ensure tax compliance. By avoiding common misunderstandings, following tax best practices, and taking a more proactive approach to reporting benefits now, professionals can protect the employee and corporation from significant tax setbacks in the future.