If you helped an employee move this year and treated the reimbursement as tax-free, your payroll is wrong — and the error now compounds forever. The One Big Beautiful Bill Act (OBBBA) permanently repealed the federal moving expense deduction and the tax-free treatment of employer-paid moving reimbursements, closing a door that had been scheduled to swing back open on January 1, 2026.
Here's what changed, who still qualifies for the old treatment, and how to fix your relocation policy and payroll before year-end.
What Actually Changed: Section 70113 in Plain English
From 2018 through 2025, the Tax Cuts and Jobs Act (TCJA) suspended two related tax breaks:
- The employee deduction (Section 217): workers could no longer deduct unreimbursed moving costs as an above-the-line adjustment.
- The employer exclusion (Section 132(a)(6) and (g)): reimbursements you paid for an employee's qualified moving expenses had to be included in wages, subject to income and employment taxes.
The key word was suspended. Under the TCJA as written, both breaks were scheduled to come back for tax years beginning after December 31, 2025 — meaning the pre-2018 rules (deductible moves that met the distance and time tests, tax-free employer reimbursements) would have returned this year.
OBBBA Section 70113, effective for tax years beginning after December 31, 2025, makes the repeal permanent. The Joint Committee on Taxation scores the change at roughly $700 million in additional revenue for 2026 and $13.6 billion over the 2025–2034 window — a measure of just how much tax-free moving money Congress expected to flow once the suspension lapsed.
What "permanent" means for your 2026 payroll
Every dollar you spend moving an employee — reimbursements, lump sums, and payments you make directly to the moving company, the temporary-housing landlord, or anyone else on the employee's behalf — is now supplemental wages. That means:
- Federal income tax withholding (generally at the 22% flat supplemental rate, up to $1 million)
- Social Security and Medicare (FICA) taxes
- State and local withholding where applicable
- Reporting in Boxes 1, 5, and 16 of Form W-2
There is no distance test to pass, no 39-week employment test to track, and no Form 3903 to file for ordinary civilian employees. Those mechanics survive only for the two groups below.
The Two Groups That Still Get the Old Treatment
1. Active-duty military on a permanent change of station
Unchanged from the TCJA years: members of the U.S. Armed Forces who move pursuant to a military order related to a permanent change of station can still exclude qualified moving reimbursements from income and deduct unreimbursed costs. If you employ reservists, Guard members, or military spouses, note the exception follows the military move, not the person — a civilian job change by a veteran gets no break.
2. Intelligence community members (new in 2026)
OBBBA expands the military-style exception to employees and new appointees of the intelligence community, as defined under the National Security Act of 1947. Like their military counterparts, qualifying IC members can exclude employer-paid qualified moving expenses and deduct unreimbursed ones.
This is a narrow carve-out, not a loophole for contractors: it covers actual IC employees and appointees, not the much larger population of cleared contractors supporting intelligence agencies. If your business does hire former or current IC personnel, don't assume — verify the individual's status and the nature of the move before treating anything as excludable.
The Employer Playbook: Five Things to Fix Now
1. Rewrite any offer letter that promises "tax-free" relocation
If your offer templates, relocation policy, or recruiting emails describe moving assistance as tax-free, tax-deductible, or "grossed up so you owe nothing," update them now. The most common version of this mistake: a hiring manager verbally promises a $20,000 "tax-free" moving bonus, payroll correctly withholds on it, and the new hire feels shortchanged on day one. State the gross amount and say plainly that it is taxable wages subject to withholding.
2. Decide your gross-up policy deliberately
Because every relocation dollar is taxable, a $25,000 reimbursement at a combined 30% marginal rate delivers only about $17,500 of spending power. Many employers "gross up" — paying extra to cover the employee's tax hit. A gross-up is itself taxable wages, so the math is iterative: to deliver $25,000 net at a 30% rate, you pay $25,000 / (1 − 0.30) ≈ $35,714, not $32,500.
Common approaches:
- Full gross-up: you absorb the entire tax cost. Simple, generous, expensive.
- Partial or capped gross-up: you gross up to a fixed percentage (say, 25%) and the employee bears the rest.
- No gross-up, higher lump sum: you pay a bigger round number and let the employee manage the taxes.
Whatever you choose, put it in writing. Relocation is one of the largest single payments many employees ever receive from you — industry benchmarks put typical U.S. domestic packages between $15,000 and $75,000, with average total costs per relocating homeowner file approaching $80,000 once home-sale assistance is included — so ambiguity here creates real disputes.
3. Capture vendor-direct payments in payroll
This is the single most-missed withholding obligation in relocation. When you pay the moving company, the corporate apartment, or the home-finding service directly instead of reimbursing the employee, those payments are still the employee's taxable wages. They must flow to payroll for withholding and W-2 reporting.
Set up a process where every relocation-related vendor invoice is tagged to the employee and reported to payroll in the same pay cycle — spreading withholding across several paychecks is far less painful than a surprise true-up in December. If your AP system can't tag invoices to employees, that's the fix to make first.
4. Don't forget the states that still allow the deduction
Federal law is now settled, but a handful of states never conformed to the TCJA suspension and still allow a moving expense deduction or exclusion on the state return — generally following the old federal distance and time tests. Confirmed examples include California, New York, Pennsylvania, and Massachusetts, with a few others in the same camp.
Practical consequences:
- Employees who move within or into these states may still get state-level relief. Tell them to check with their preparer rather than assuming the federal rule applies everywhere.
- If you gross up for state taxes too, you may be overpaying in non-conforming states. Some employers now run state-specific gross-up rates for relocations touching those states.
- State withholding on the supplemental wages is still required up front — the deduction, where it exists, comes at filing time.
5. Separate relocation from travel in your books
Relocation reimbursements are wages; business travel reimbursements under an accountable plan are not. Mixing the two in one "travel and relocation" GL account makes it easy to under-withhold on the relocation portion — or to over-withhold on legitimate travel. Keep separate accounts, separate approval workflows, and separate payroll feeds for the two categories. If you keep your ledger in plain text, the documentation shows how to structure payroll clearing accounts so each feed reconciles on its own.
Mistakes That Trigger Notices (and Angry New Hires)
- Treating lump sums as non-taxable. A $10,000 "moving allowance" with no accounting of actual expenses is just a bonus with a friendlier name. Withhold on it like one.
- Forgetting household-goods storage beyond the move. Even for military and IC movers, only qualified expenses (moving household goods, plus travel and lodging en route, excluding meals) qualify. House-hunting trips, temporary living beyond the move itself, and real-estate transaction costs were never qualified expenses.
- Applying the military exception to civilian moves by veterans. The exception requires a move pursuant to military order. A veteran you hire for a civilian role is taxed like any other employee.
- Promising gross-ups you can't compute. If your payroll provider can't run supplemental-rate withholding on relocation batches, fix that before you promise any gross-up in writing.
- Ignoring the December pile-up. Relocation payments cluster at year-end (holiday moves, start-date bonuses). Unreported vendor-direct payments discovered in January mean corrected W-2s and amended employment tax returns. Reconcile relocation accounts monthly in Q4.
A Quick Refresher: The Old Tests, for the Two Exceptions and the States
For military and IC movers — and for state returns in non-conforming states — the pre-2018 mechanics still matter:
- Distance test: the new workplace must be at least 50 miles farther from the old home than the old workplace was (military PCS moves are exempt from this test).
- Time test: full-time work for at least 39 weeks in the 12 months after the move (78 weeks over 24 months for the self-employed). Again, military moves are exempt.
- Qualified expenses: reasonable costs of moving household goods and personal effects, plus travel and lodging for the employee and household members traveling to the new home. Meals were never deductible as moving expenses.
Everyone else: none of this applies at the federal level anymore. There is no test to pass because there is no deduction to claim.
Keep Your Relocation Accounting Clean From Day One
As you update offer letters and payroll processes for the permanent repeal, make sure relocation dollars are tracked separately from travel, benefits, and bonuses — per employee, per move, with vendor-direct payments flowing to payroll automatically. Clean records are what turn a $50,000 relocation package into a routine W-2 line instead of a January scramble. Beancount.io provides plain-text accounting that gives you complete transparency and control over your financial data — no black boxes, no vendor lock-in. Get started for free and see why developers and finance professionals are switching to plain-text accounting.
