How would IRS treat reimbursement in a later year of moving expenses?
IRS pub 521 has all the information you need. Expenses reimbursed. If you are reimbursed for your expenses and you   use the cash method of accounting, you can deduct your expenses either   in the year you paid them or in the year you received the   reimbursement. If you use the cash method of accounting, you can   choose to deduct the expenses in the year you are reimbursed even   though you paid the expenses in a different year. See Choosing when to   deduct, next. If you deduct your expenses and you receive the   reimbursement in a later year, you must include the reimbursement in   your income on Form 1040, line 21 This is not unusual. Anybody who moves near the end of the year can have this problem. The 39 week time test also can be an issue that span over 2 tax years. I would take the deduction for the expenses as soon a I could, and then count the income in the later year if they pay me back. IF they do so before April 15th, then I would put them on the same tax form to make things easier. I believe moving reimbursement has to be counted as income no matter when you get it. I'd just put it under miscellaneous income with an explanation.
After reading OP Mark's question and the various answers carefully and also looking over some old pay stubs of mine, I am beginning to wonder if he is mis-reading his pay stub or slip of paper attached to the reimbursement check for the item(s) he purchases.  Pay stubs (whether paper documents attached to checks or things received in one's company mailbox or available for downloading from a company web site while the money is deposited electronically into the employee's checking account) vary from company to company, but a reasonably well-designed stub would likely have categories such as Taxable gross income for the pay period: This is the amount from which payroll taxes (Federal and State income tax, Social Security and Medicare tax) are deducted as well as other post-tax deductions such as money going to purchase of US Savings Bonds, contributions to United Way via payroll  deduction, contribution to Roth 401k etc. Employer-paid group life  insurance premiums are taxable income too for any portion of the policy  that exceeds $50K. In some cases, these appear as a lump sum on the last pay stub for the year. Nontaxable gross income for the pay period: This would be sum total of the amounts contributed to nonRoth 401k plans, employee's share of group health-care insurance premiums for employee  and/or employee's family, money deposited into FSA accounts, etc. Net pay: This is the amount of the attached check or money sent via ACH to the employee's bank account. Year-to-date amounts: These just tell the employee what has been earned/paid/withheld to date in the various categories. Now, OP Mark said My company does not tax the reimbursement but they do add it to my running gross earnings total for the year. So, the question is whether the amount of the reimbursement is included in the Year-to-date amount of Taxable Income. If YTD Taxable Income does not include the reimbursement amount,  then the the OP's question and the answers and comments are moot; unless the company has really-messed-up (Pat. Pending) payroll software that does weird things, the amount  on the W2 form will be whatever is shown as YTD Taxable Income  on the last pay stub of the year, and, as @DJClayworth noted cogently, it is what will appear on the W2 form that really matters. In summary, it is good that OP Mark is taking the time to investigate the matter of the reimbursements appearing in Total Gross Income, but if the amounts are not appearing in the YTD Taxable Income, his Payroll Office may just reassure him that they have good software and that what the YTD Taxable Income says on the last pay stub is what will be appearing on his W2 form.  I am fairly confident that this is what will be the resolution of the matter because if the amount of the reimbursement was included in Taxable Income during that pay period and no tax was withheld, then the employer has a problem with  Social Security and Medicare tax underwithholding, and nonpayment of this tax plus the employer's share to the US Treasury in timely fashion. The IRS takes an extremely dim view of such shenanigans and most employers are unlikely to take the risk. It would be unusual but it is possible that the expenses could be very high compared to your income. The IRS in pub 529 explains the deduction. You can deduct only unreimbursed employee expenses that are: Paid or incurred during your tax year, For carrying on your trade or business of being an employee, and Ordinary and necessary. An expense is ordinary if it is common and accepted in your trade,   business, or profession. An expense is necessary if it is appropriate   and helpful to your business. An expense doesn't have to be required   to be considered necessary. The next part lists examples. I have cut the list down to highlight ones that could be large. You may be able to deduct the following items as unreimbursed employee   expenses. Damages paid to a former employer for breach of an employment contract. Job search expenses in your present occupation. Legal fees related to your job. Licenses and regulatory fees. Malpractice insurance premiums. Research expenses of a college professor. Rural mail carriers' vehicle expenses. Tools and supplies used in your work. Work clothes and uniforms if required and not suitable for everyday use. Work-related education. If the term of employment was only part of the year, one or more of the these could dwarf your income for the year. Before deducting something that large be sure you can document it. I believe the IRS computers would flag the return and I wouldn't be surprised if they ask for additional proof. 4 months working from your kitchen doesn't sound like an isolated or incidental transaction. So I think that yes, that income would be taxable by NYS (and NYC/Yonkers if the kitchen is in these cities). Assuming the US, if a human assessor audited you, could you show a future profit motive or will they conclude you are expensing a hobby? If you answer yes, you are likely to only be deducting limited expenses this year, carrying forward losses to your profitable years.  See the examples in pub 535: http://www.irs.gov/publications/p535/ch01.html#en_US_2014_publink1000208633 "I'm mostly guessing based on existing documentation, and have no direct experience, so take this with a pinch of salt. My best understanding is that you need to file Form 843. The instructions for the form say that it can be used to request: A refund or abatement of a penalty or addition to tax due to    reasonable cause or other reason (other than erroneous written    advice provided by the IRS) allowed under the law. The ""reasonable cause"" here is a good-faith confusion about what Line 79 of the form was referring to. In Form 843, the IRC Section Code you should enter is 6654 (estimated tax). For more, see the IRC Section 6654 (note, however, that if you already received a CP14 notice from the IRS, you should cross-check that this section code is listed on the notice under the part that covers the estimated tax penalty). If your request is accepted, the IRS should issue you Notice 746, item 17 Penalty Removed: You can get more general information about the tax collection process, and how to challenge it, from the pages linked from Understanding your CP14 Notice" Well you've got to think about the process, but first make sure the thing you want to pay for is actually a qualified dependent care expense.  Here is a list of eligible expenses from a national FSA administrator. This process will tie up your money for some amount of time.  Your deduction will come out like clockwork.  But there is a time-delay of potentially months between your deduction and receipt of a reimbursement. Dependent care plans are money-in money-out.  You can only file a reimbursement on funds that have actually been contributed, which is different than a medical FSA.  Additionally, you can only file a claim on expenses that have actually been incurred.  Dependent care FSA elections can be changed through the year on an as needed basis.  This would add an administrivia burden to the person running your payroll, and if there is a payroll vendor in place, likely an actual cost.  The administrator in this situation would likely be the company.  In the formalities of employee benefits there must always be a named administrator. If your employer currently offers no benefits you should press healthcare first.  Paying healthcare premiums pretax would likely save you more money and be less administration than this.  Additionally, if your employer is paying for or reimbursing you for your individual health insurance that's currently illegal under the ACA. As a resident of New York State you will, in addition to the Federal income tax handled by the IRS, be responsible for state and local income taxes. For New York the state tax forms are also used to determine your New York city tax. If HR was either not aware of the local tax requirement for New York or you filled out the New York State version of the W-4 incorrectly you may have had too little tax withheld for New York state. The refund from the IRS is not dependent on the refund/owe status for state and local taxes. It is possible that your state taxes are fine but that you owe taxes to the city. That tax you owe to the city will reduce the refund from the state and may require you to pay money to New York. Of course if you do itemize, what you pay to the state and city may result in deductions on your federal form. If you owe back taxes to the state or local government this could result in the IRS seizing a federal refund, but that doesn't happen right away. If the employer provides housing to the employee, the employer has to identify whether it is taxable or not. If it is - the amounts would be added to the taxable income on your W2. All the withholding and FICA tax calculations will be performed based on that taxable income. If the employer fails to do that, and you get audited, you can be left on the hook for the unpaid taxes on the unreported income. In some cases, employee housing is a non-taxable fringe benefit, in others it is taxable. Your tax adviser will help identify which case applies to you. After you added in a comment that you're trying to see if you should be asking your boss to pay your personal expenses vs. giving you a raise - as I said in the comments, your personal expenses are not deductible neither for you nor for anyone else. If your boss pays your rent instead of a raise - its taxable income for you. Generally for tax questions you should talk to a tax adviser. Don't consider anything I write here as a tax advice, and the answer was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer. Does IRS like one payment method over other or they simply don't care   as long as she can show the receipts? They don't care as long as she withholds the taxes (30%, unless specific arrangements are made for otherwise). She should withhold 30% of the payment and send it to the IRS. The recipient should claim refund, if the actual tax liability is lower. It's only consulting work at the moment, so most of the communication   is done over phone. Should they start engaging in written   communication to keep records of the work done? Yes, if she wants it to be a business expense. Is it okay to pay in one go to save money-transferring fees? Can she   pay in advance? Again, she can do whatever she wants, but if she wants to account for it on her tax returns she should do it the same way she would pay any other vendor in her business. She cannot use different accounting methods for different vendors. Basically, she has not outsourced work in previous years, and she   wants to avoid any red flags. Then she should start by calling on her tax adviser, and not an anonymous Internet forum. You have two different operations going on: They each have of a set of rules regarding amounts, timelines, taxes, and penalties. The excess money can't be recharacterized except during a specific window of time.  I would see a tax professional to work through all the details. "The short answer is that the IRS knows this is an issue, so they are prepared to deal with the ""discrepancies.""  The filer does not need to something special to call it to their attention.  Keep good records and consistently report according to your accounting processes.   Exactly how the IRS resolves / flags this, I don't know.  Maybe someone else can answer, but you can imagine that if they track you for multiple years they should have some idea of how many dollars are rolling over and whether you might have ""forgotten"" to report something from a few years ago that happened at a year-end break." You pay it this tax year.  Whether that's now due to W-2 withholding, or later with your 1040 next year, or with your 1040-ES all depends on your particular situation. (I am making the assumption that this is a US based question). Keep in mind that the alternative is to amend your tax forms from 2010, and 2011. The IRS and the State will want their money, they might not to wait for 78 paychecks. That is 3 years.  Ask for lots of documentation, so you understand what they are doing. "You report it when the expense was incurred/accrued. Which is, in your case, 2014. There's no such thing as ""accounts payable"" on tax forms, it is an account on balance sheet, but most likely it is irrelevant for you since your LLC is probably cash-based. The reimbursement is a red-herring, what matters is when you paid the money." With a $40,000 payment there is a 100% chance that the owner will be claiming this as a business expense on their taxes.  The IRS and the state will definitely know about it, and the risk of interest and penalties if it is not claimed as income make the best course of action to see a tax adviser. Because taxes will not be taken out by the property owner, the tax payer should also make sure that the estimated $10,000 in federal taxes, if they are in the 25% tax bracket, doesn't trigger other tax issues that could result in penalties, or the need to file quarterly taxes next year. This kind of extra income could also result in a change or an elimination of a health care subsidy. A unexpected mid-year  change could trigger the need to refund the subsidy received this year via the tax form next April.