Are Relocation Bonuses Considered Taxable Income?

Receiving a bonus to help with moving costs for a new job comes with tax implications. Relocation bonuses are considered taxable income by the Internal Revenue Service (IRS) and are subject to federal, state, and local income taxes. Your employer will treat this payment as part of your overall compensation for the year, impacting your net pay and annual tax return.

Tax Treatment of Relocation Payments

The IRS classifies relocation bonuses as supplemental wages, which are payments made outside of an employee’s regular salary. As supplemental income, your bonus is subject to federal income tax, Social Security tax, and Medicare tax (FICA taxes), just like your normal wages.

A significant change resulted from the Tax Cuts and Jobs Act of 2017 (TCJA), which suspended the moving expense deduction for most taxpayers from 2018 through 2025. This means you generally cannot deduct costs like hiring a moving company, transportation, or storage fees, even if your bonus was intended to cover them. Whether you receive a lump-sum payment, a direct reimbursement for specific costs, or services paid for by your company, the value is added to your taxable income.

The primary exception to this rule applies to certain members of the U.S. Armed Forces on active duty who move due to a permanent change of station. For most civilian employees, the full amount of the relocation payment is considered taxable income.

Some employers offer a “tax gross-up” on relocation payments to offset this liability. This means the company pays an additional amount to cover the taxes on the bonus. While this is a company policy and not a legal requirement, it can reduce the financial burden on the employee.

Employer Withholding on Your Bonus

Your employer is required to withhold taxes from your relocation bonus before you receive it. The amount withheld is calculated using one of two IRS-approved methods for supplemental wages.

The most common approach is the percentage method. Under this rule, employers withhold a flat 22% for federal income tax on supplemental payments up to $1 million in a calendar year. This method is straightforward for payroll departments because it does not require them to consider your regular pay rate or the information on your Form W-4.

The alternative is the aggregate method. With this approach, your employer combines the relocation bonus with your regular wages for the current payroll period. The total amount is treated as a single payment, and withholding is calculated based on the information you provided on your Form W-4. This method might result in a higher or lower withholding rate than the flat 22%, depending on your individual tax situation.

State and Local Tax Considerations

Your relocation bonus is almost always subject to state and local income taxes, which vary by jurisdiction. This can add complexity, particularly when moving between states with different tax laws and rates.

If you move from one state to another during the year, you may have a tax liability in both your old and new locations. States have different rules for taxing income earned by part-year residents. Your bonus could be taxed by the state you are leaving, the state you are moving to, or be apportioned between them.

This situation requires careful attention to the tax regulations of each state involved. You will need to determine how each state defines residency and how it sources compensation income. Failing to correctly account for state taxes can lead to underpayment penalties and unexpected tax bills when you file your annual returns.

Reporting Relocation Income on Your Tax Forms

You do not need a special form to report your relocation bonus on your annual tax return. Your employer will include the full amount of the bonus in the total wages reported in Box 1 of your Form W-2, “Wages, tips, other compensation.”

This form consolidates all income from that employer. The federal income tax withheld from your bonus is included in the total shown in Box 2. The bonus is also included in the wage amounts for Social Security and Medicare, reported in Box 3 and Box 5, with the corresponding taxes withheld shown in Box 4 and Box 6.

You will transfer the total wage amount from Box 1 of your W-2 to the appropriate line on your Form 1040. The relocation income is not reported separately but is part of the total income figure used to calculate your overall tax liability for the year.