4

Situation:

  1. Company C buys a flight ticket for employee E, for him to relocate.
  2. Ticket costs $X, so C increases the income of E by $X, and reports it as income on Form W2 form, Box 1 (Wages).
  3. C also withholds $T because of the additional $X.
    This withholding is reported on Form W2, Boxes 2, 17, etc. ("Federal income tax withheld" and friends).

Now, the interesting part -

  1. C also reports the tax itself, $T, as income, and adds it to Form W2, Box

(the whole thing is called "tax assistance & allocation)

Question:

Does it make sense to report withheld tax income as an additional income?
Is it required by the IRS? Is $T deductible?

Edit:

To emphasize, I can deduct $X from my income, because this is a business expense (never mind the exact computation), so I wouldn't have paid $T.

Can I also deduct $T in some way?

In other words, had C not have been nice, I would be in a better position!

  • If it were cash and yer were in the 25% bracket, they would have to give you $133 for you to net $100. $133 is the income, fully taxed. It's commonly called 'grossing up.' – JTP - Apologise to Monica Jul 30 '13 at 22:30
  • @JoeTaxpayer Don't forget the Social Security and Medicare taxes which have to be paid on the $133! Actually, depending on the circumstances, moving expenses or relocation expenses can be reimbursed by the company without having the money appear on a W-2 form as wages paid to the employee. It is also true that in certain other circumstances, the strategy used by the company is the only one that makes sense to make sure that the employee is not out of pocket because of the relocation. – Dilip Sarwate Jul 30 '13 at 22:52
  • Response to Edit: Depending on the facts of the matter, unreimbursed business expenses are deductible as a Miscellaneous Deduction on Schedule A which is subject to a 2% of AGI threshold test: only that part of the total miscellaneous deductions that exceeds 2% of AGI is deductible, which in many (most?) cases means no deduction at all. So don't look the gift horse of $T in the mouth! – Dilip Sarwate Jul 30 '13 at 22:56
  • @DilipSarwate Yes, that's the part of "never mind the exact computation" - my situation is that I can deduct all of $X. Regarding the horse, $T is worth almost $1k in taxes. Can I deduct $T? Can I ask C not to "help" me with $T? – user1071136 Jul 30 '13 at 23:16
  • 1
    But C helped you with X+T, not just T. How can you deduct X if you haven't paid it? You've been de-facto reimbursed, so you cannot claim it as "unreimbursed expense". If you want to deduct it - you'll have to spend your own $X after tax, and then claim deduction. Even if you already have enough unreimbursed expenses to put you above the 2% AGI threshold - you'll end up at exactly the same place, so why bother? – littleadv Jul 30 '13 at 23:29
3

Does it make sense to report withheld tax income as an additional income? Is it required by the IRS? Is $T deductible?

This is what is called imputed income. The ticket is an income for you, but the company doesn't want you to pay tax on it. But you have to. But they want to be nice to you and give you the ticket on their buck. But that's the law.

So what have the accountants invented? Imputed income. The company raises your salary in the amount of taxes paid (+some, but that's negligible), in addition to the actual ticket. So it seems, to you, that you got the ticket for free. The IRS doesn't see the ticket, it just sees that you got a $T+$X bonus and paid $T taxes. The fact that the $X you got in form of a ticket doesn't matter to them.


Re your edit - you cannot deduct anything, since you can only deduct unreimbursed expenses, whereas $X is not at all an expense for you (you didn't buy that ticket, the company did), and $T is taxes, which are not deductible (its not an expense).

In other words, had C not have been nice, I would be in a better position!

No.

Your net pay shouldn't be affected, technically, so from your perspective you just got a plane ticket for free.

Had C not been nice, you would still not be able to deduct the whole cost of $X, because unreimbursed employee expenses have a 2% AGI threshold.

  • Thanks for the quick answer! I've edited my question to emphasize my issue. – user1071136 Jul 30 '13 at 22:41
  • @user1071136 addressed that for you. – littleadv Jul 30 '13 at 23:02
  • Thanks for the edit! (1) I just realized this all makes sense if C gave me $T, in addition to my salary. But they didn't. (2) 2nd bullet on top of 2106 states that amounts in Box 1 are not considered reimbursements. According to this, I can deduct. Also, my AGI is low enough s.t. all of the amount is above the 2% threshold. – user1071136 Jul 31 '13 at 15:47
  • @user1071136 I don't understand. You said they did add it to the income. Now you're saying they didn't? Who paid for the ticket - you or the employer? I think you're confused. – littleadv Jul 31 '13 at 15:55
  • Sorry, clarifying: $T was added to Box 1, but was not given to me (that is, my reported income was increased, while the money I actually got, remained the same). The employer paid for the ticket. Am I missing something? – user1071136 Jul 31 '13 at 15:58
1

This very topic was the subject of a question on workplace SE https://workplace.stackexchange.com/questions/8996/what-can-relocation-assistance-entail

TL/DR; From tax publication 521 - Moving expenses table regarding how to report

IF your Form W-2 shows... your entire reimbursement reported as wages in box 1

AND you have... moving expenses

THEN... file Form 3903 showing all allowable expenses,* but do not show any reimbursements.

There are tax implications Covered in tax publication 521 - Moving expenses and Employers tax guide to Fringe Benefits related to moving expenses.

From the Employers View:

Moving Expense Reimbursements

This exclusion applies to any amount you directly or indirectly give to an employee, (including services furnished in kind) as payment for, or reimbursement of, moving expenses. You must make the reimbursement under rules similar to those described in chapter 11 of Publication 535 for reimbursement of expenses for travel, meals, and entertainment under accountable plans.

The exclusion applies only to reimbursement of moving expenses that the employee could deduct if he or she had paid or incurred them without reimbursement. However, it does not apply if the employee actually deducted the expenses in a previous year. Deductible moving expenses. Deductible moving expenses include only the reasonable expenses of:

  • Moving household goods and personal effects from the former home to the new home, and

  • Traveling (including lodging) from the former home to the new home.

Deductible moving expenses do not include any expenses for meals and must meet both the distance test and the time test. The distance test is met if the new job location is at least 50 miles farther from the employee's old home than the old job location was. The time test is met if the employee works at least 39 weeks during the first 12 months after arriving in the general area of the new job location.

For more information on deductible moving expenses, see Publication 521, Moving Expenses.

Employee. For this exclusion, treat the following individuals as employees.

  • A current employee.

  • A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control.

Exception for S corporation shareholders. Do not treat a 2% shareholder of an S corporation as an employee of the corporation for this purpose. A 2% shareholder is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power. Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, but do not treat the benefit as a reduction in distributions to the 2% shareholder.

Exclusion from wages. Generally, you can exclude qualifying moving expense reimbursement you provide to an employee from the employee's wages. If you paid the reimbursement directly to the employee, report the amount in box 12 of Form W-2 with the code “P.” Do not report payments to a third party for the employee's moving expenses or the value of moving services you provided in kind.

From the employees view:

The not be included as income the expenses must be from an accountable plan:

Accountable Plans

To be an accountable plan, your employer's reimbursement arrangement must require you to meet all three of the following rules.

  • Your expenses must have a business connection – that is, you must have paid or incurred deductible expenses while performing services as an employee of your employer. Two examples of this are the reasonable expenses of moving your possessions from your former home to your new home, and traveling from your former home to your new home.

  • You must adequately account to your employer for these expenses within a reasonable period of time.

  • You must return any excess reimbursement or allowance within a reasonable period of time.

Also what is interesting is the table regarding how to report

IF your Form W-2 shows... your entire reimbursement reported as wages in box 1

AND you have... moving expenses

THEN... file Form 3903 showing all allowable expenses,* but do not show any reimbursements.

  • Thanks for the answer! (1) I cannot claim Moving Expenses (f3903), only Business Expenses (f2106). (2) I've read these documents and I'm interested in your interpretation, under my circumstances. – user1071136 Jul 31 '13 at 14:32
  • In your case: Does it meet the distance and time rules? Does it meet the accountability rules? If yes it wasn't supposed to be income, it was supposed to be on Box 12 with a code of P. If they paid for the ticket directly "Do not report payments to a third party for the employee's moving expenses or the value of moving services you provided in kind." – mhoran_psprep Jul 31 '13 at 14:57
  • Thanks for the comment - as states in the question, all amounts appear in Box 1, and I do not meet the rules, therefore cannot claim Moving Expenses. Again, C did pay for the ticket, and did include it in Box 1. – user1071136 Jul 31 '13 at 15:52
  • @user1071136 again - if your company paid for the ticket, why are you deducting it as your expense? And why is it at all expense? You're relocating, its not an expense at all. – littleadv Jul 31 '13 at 15:58
  • why did you not meet the rules? – mhoran_psprep Jul 31 '13 at 16:04

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.