Major tax reform rocked the relocation industry on December 22, 2017 when The Tax Cuts and Jobs Act (TCJA) was approved by congress. The most realized effect was the removal of tax exempt status for qualified moving expenses. In November’s edition of Mobility Magazine, Peter Scott, Worldwide ERC®’s tax counsel, details an additional effect of the TCJA.
A Repayment Agreement protects your financial investment in an employee’s relocation. The agreement establishes that an employee must repay reimbursable relocation expenses upon termination of employment. Typically, these are structured on a prorated basis determined by the length of employment, such as 100% repayment within the first year and 50% repayment between 13-24 months.
According to Scott, “repayments in the same [tax] year as the move are not at issue, because such repayments are accounted for by simply adjusting withholding and payroll taxes.” The company would credit the employee the overpayment in withholding and FICA and adjust the wages on Form 941 accordingly.
Previously, repayments in a subsequent year were deductible on the employee’s taxes. With the passing of the TCJA, employers must now:
- provide a Form W-2c for the FICA and Medicare collected;
- refund the employee share of FICA and Medicare;
- obtain a written statement from the employee that they will not seek a refund; and,
- claim a FICA and Medicare credit on a subsequent Form 941.
The TCJA’s suspension of miscellaneous itemized deductions applies to all repayments beginning with moves in 2018. Scott does additionally mention Section 1341, however given the fact that it is only applicable if “a deduction is allowable for the taxable year,” it cannot be used in this instance.
As we approach 2019, this change may seriously impact the employee from a financial standpoint. However, Scott warns that under no circumstance should the debt be forgiven or written off. The IRS treats forgiveness of the repayment agreement debt as taxable wages to the employee, requiring a Form W-2, income tax withholding, and payment of payroll taxes. This creates additional expenses on part of the company.
