When employees are taking a pre-decision home finding trip the expenses incurred could be taxable to the employee and subject to withholding.
The key to determining if a pre-decision home finding trip is taxable is based on the primary purpose for the trip and whether the trip is for a current employee, a new hire with a signed employment contract or a prospective employee with no signed employment contract.
Type of trip and status of employee determines tax laws
In our first instance, a prospective employee is going to attend an interview with the prospective employer. For this trip to not be subject to taxation, the expenses should be reimbursed/paid for by the company and the trip should commence prior to an individual accepting employment. According to the Internal Revenue Service (IRS), this would be considered “travel expenses incurred in interviewing at the prospective employer’s home office. Therefore, neither a form W-2 nor a form 1099 is necessary.”
Should the employer make the payment of the trip contingent on the hiring of the prospective employee, this would then become a taxable expense, i.e., payment or reimbursement would constitute consideration for services to be rendered. The IRS deems payments based on the contingency of a prospective employee being hired remuneration for services rendered or to be rendered in an employment relationship.
Newly hired or current employee
If a newly hired or current employee is conducting a bona fide business trip in the prospective new work location and his/her tax home has not changed, then the transportation, meals and lodging expenses could be considered non-taxable. However, if the employee stays any additional days for home finding/area familiarization tour then any additional meals and lodging expenses would be considered moving expenses and taxable to the employee.
In addition, should a spouse, partner and/or family member(s) accompany the employee on the trip, all expenses incurred on their behalf are fully taxable.
It is important to keep in mind that the presence of the spouse, partner and/or family member(s) can make it more difficult in characterizing the primary purpose of the employee’s trip as business.
Tax law nuances
Most pre-decision home finding trip expenses for new hires or current employees are taxable. Many companies tend to think of this as a recruiting event which is not taxable, but unfortunately the law does not support such an argument.
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- Business and Househunting Trip; Prepared by Worldwide ERC® Tax Counsel, Peter K. Scott Peter Scott Associates; January 2018 (Readers must be Worldwide ERC® members to access this study, please login here.)