It's worth taking into account all of the financial impacts of a paid PCS, including tax treatment of reimbursements. Image: Travelpixs/Shutterstock.com
By: Michael Huckeby, General Engineer USAFWhen perusing job listings on USAJobs, we all love to see the notation: Relocation expenses reimbursed.
Yes—You may qualify for reimbursement of relocation expenses…
The paid PCS (permanent change of station) is a great federal employee benefit. Or was. Congress manages to find a way to reduce the value of almost every employee benefit, and that happened for the PCS benefit with the Tax Cuts And Jobs Act of 2017. Portions of PCS costs were taxable prior, but this act made virtually all PCS costs taxable. More importantly, they are taxable as “in kind” benefits, meaning equivalent of wages.
But aren’t these taxes also reimbursable? Yes. And no. Any federal, state, or local income taxes owed on the PCS reimbursements are reimbursable through two allowances, the Withholding Tax Allowance (WTA) and the Relocation Income Tax Allowance (RITA). But as an in-kind benefit, Social Security (OASDI) and Medicare taxes are also owed, and those taxes come out of the employee’s pocket without reimbursement.
The governing regulation is Title 41 of the Code of Federal Regulations, Section 302. 41 CFR §302-17.22(d) states that WTA does not cover: Additional taxes due under the Federal Insurance Contributions Act including Social Security tax, if applicable, and Medicare tax. Current law does not allow Federal agencies to reimburse transferees for these employment taxes on relocation benefits [emphasis added]. However, your agency will deduct for these taxes from your reimbursements for taxable items.
RITA doesn’t cover these taxes either.
What is the effect? Let’s say you take a new job with a paid PCS within the United States, resulting in a CONUS-to-CONUS move. The total cost of the PCS is $12,500. Some of that is paid to the employee through the travel voucher process, and the rest is paid to a government contractor to move HHG (household goods). All of these costs are taxable.
The combination of Social Security and Medicare is 7.65%, meaning the employee will pay:
0.0765 x $12,500 = $956.25
…out-of-pocket for the PCS.
Not a huge amount, and if the new job is a promotion, probably worth the investment.
Let’s take another case. You take a new job overseas with a paid PCS and return rights to your previous job (CONUS-to-OCONUS followed by OCONUS-TO-CONUS). An overseas PCS probably costs between $50,000 and $80,000 depending on location, total weight of HHG shipped, whether or not your ship a POV (if authorized), and number of dependents. An overseas assignment is typically 3 years, extendable to 5. For this example, let’s say your PCS to the OCONUS location costs $60,000, you stay for 4 years, and the return PCS costs $70,000. That means you will pay out of pocket $4,590 the year you go overseas and $5,355 the year you return, almost $10,000 in a period of 4 years.
Quite a different financial impact, especially if neither move involves a promotion.
Most of these taxes are on payments to government contractors, so there is nothing to deduct the Social Security and Medicare taxes from. Your agency will collect the taxes in the form of a travel debt. Likely you will receive a very curt memo saying you owe money to the government, with little (if any) documentation or explanation, and no supporting calculations. For civilians, there is an option to pay the travel debt over 3 years (or less) via payroll deduction rather than paying lump sum.
This article is not meant to discourage anyone from taking a paid PCS to a new job, nor from going overseas. Obviously paying 7.65% of the cost of a PCS is better than paying the full cost. This article is only meant to provide information allowing you take into account the financial impacts of a paid PCS. If the selecting official or civilian personnel element tell you that all costs will be reimbursed, they’re lying, either through ignorance or indifference.
A final note, Social Security is only collected on wages (and in-kind benefits) up to $160,200 (this is the 2023 limit, and there is no equivalent limit on Medicare). Therefore it is possible that, depending on your income and financial situation, Social Security taxes will be due on less than the full PCS cost amount.
Michael Huckeby is a General Engineer with the US Air Force and has worked for USAF for 27 years, with 3 overseas assignments in that time, only one of which was after the Tax Cuts And Jobs Act of 2017.
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