Your employer may occasionally require you to work at a different location temporarily but longer than the amount of time usually associated with a business trip. For example, you may be working on a project or assisting in opening a new location. These temporary assignments typically require you to stay in temporary housing. Reimbursements you receive for temporary housing while on temporary assignment are not taxable, but those received for permanent assignments are.
Definition of Temporary Housing
According to the Internal Revenue Service, temporary housing is housing that you live in when working on a temporary assignment for your employer that takes you outside of an acceptable commuting distance from your home. The IRS further defines "temporary" as one year or less. Temporary housing may include a hotel or motel, an apartment or a rented house.
Nontaxable: Temporary Move
Any reimbursements that you receive from your employer for travel and living expenses you incur while on a temporary assignment are not taxable. Your employer will not include these reimbursements in your gross income on your W-2, nor should you include this income on your tax return. If you incur all or a portion of these expenses without reimbursement from your employer, you may deduct these expenses from your taxable income as unreimbursed business expenses.
Taxable: Permanent Move
The IRS does consider any reimbursements for temporary housing associated with a permanent move taxable. For example, if your employer transfers you to a new office and pays for your relocation, the IRS treats those expenses as nontaxable moving expenses. However, if your employer also pays for you to stay in temporary housing while you finalize the move out of your former home, then 100 percent of those payments are fully taxable.
If, for example, you live in temporary housing while on an eight-month assignment, the reimbursement for that housing remains fully deductible for the duration of your stay. However, if your employer and you subsequently decide that you will stay in your “temporary” location for another six months, bringing your total stint to well over a year, the IRS then considers your temporary assignment to be permanent. The date the decision was made to keep you there for longer than a year is the date that your temporary housing reimbursement becomes taxable. This applies whether your employer physically reimbursed you or paid for the housing directly.
For a permanent move, typically your employer will include all your moving expenses -- both taxable and nontaxable -- on your W-2, with the appropriate codes to clearly identify what is included in or excluded from your taxable income. Your employer will include the nonallowable expense -- the taxable income from your temporary housing -- in box 1 of Form W-2 with your other wages. The nontaxable portion of your moving expenses will appear in box 12.
Tiffany C. Wright has been writing since 2007. She is a business owner, interim CEO and author of "Solving the Capital Equation: Financing Solutions for Small Businesses." Wright has helped companies obtain more than $31 million in financing. She holds a master's degree in finance and entrepreneurial management from the Wharton School of the University of Pennsylvania.