Rent, Is It Taxable?

Q. We have an employee who is working on an extended assignment (1+ years) in another state.  This is not the state of his residence. My company is paying his apartment rent.  Is this taxable income to the employee?

A. That is a very good question.  In these turbulent economic times, employees are more apt to accept unique arrangements like this just so they can keep their job.  I see two issues at work here.  First, what amount of time is required before the employment state considers him a resident?  Second, is the employee living on-site at a business location.  Why do these questions matter?

Because I’m in Arizona and you did not mention which states are involved, I will use an Arizona example.  According to Arizona Income Tax Procedure (ITP) 92-1, if an employee is in the state for longer than 9 months, he is considered a resident.  Your employee is probably considered a resident of the state where he is working as well.  That means, he has technically relocated.  Unless he is residing on the premises of your business location (like a storage unit manager), any rent or mortgage that you pay on his behalf is taxable income to that employee and must be included in wages on the W-2.  He may also be subject to tax withholding in the state where he originally resided.  Check with a local tax advisor or CPA for details and guidance.  A good summary of this issue can be found in the Guide to Fringe Benefits, Publication 15-b from the IRS.

On a side note, if you read this page, you will see the minimum amount of time required to pass before an employee needs to have Arizona withholding. In your example, the employee is staying in the state much longer than the required 60 days.  Therefore, you would definitely have to withhold if this situation occurred in Arizona.  As you can see, withholding requirements normally begin much earlier than residency rules.  Check with the state that applies to your situation to see its requirements.