When are housing stipends taxable, and how do they work?

Sending employees out of state can be a smart move—whether it’s to fill a labor gap, provide specialized skills, or support a major project. But when tax season rolls around, housing allowances add an extra layer of complexity to payroll and travel expense calculations. 

Housing stipends are taxable, but the IRS has different rules for each benefit, which impact your employee’s taxable income and your company’s deductions. The fine print on your tax return varies depending on whether you provide a housing stipend, company-owned housing, or temporary accommodations. Stipend taxability also depends on how the chosen benefit is structured.

In this guide, we’ll explain how housing allowances work when sending employees across state lines. That way, you can focus on supporting your employees' transitions rather than worrying about tax surprises. 

When is employer-provided housing taxable to the employee?

A housing allowance provided as a fringe benefit is taxable and subject to withholding, just like regular income tax. For housing to qualify as a job requirement and enter into non-taxable status, the employee must be unable to perform their duties without living on the premises. 

To determine whether employer-provided housing is necessary, IRS publication 15-B stipulates that lodging must meet the following conditions: 

• Employers provide housing on business premises. For instance, seasonal resort staff might need to live on-site, especially if the resort is remote. 
• Lodgings are convenient for the employer. For example, an oil company might cover living expenses by providing temporary housing for remote construction workers at a drill site with no other nearby accommodations. 
• Employees accept employer-provided housing as a condition of employment. For instance, a live-in registered travel nurse who resides at a nursing facility to provide round-the-clock care must live on-site to do their job properly. 

If housing doesn’t meet all three conditions, the employee should report the total amount on their W-2 form in box 1, along with any other taxable fringe benefit. 

Tax structure and property options for employee lodging

If your business routinely sends employees to the same location, purchasing property for employee housing may be cost-effective. However, if assignments are short-term or infrequent, housing allowances for renting accommodations are often more practical. 

Property owned by the business

Owning property for employee accommodations comes with property tax obligations, which vary by state and assessed value. While the IRS allows property tax deductions, only certain portions may qualify as business expenses. Always check state-specific tax laws or consult a tax professional to understand your obligations.

Property rented by the business

Short-term housing allowances for hotels, corporate rentals, and vacation properties are great options for small business travel budgets. Rent costs are typically deductible, but only for days when employees conduct at least four hours of business activity. To streamline the process and secure competitive rates, consider partnering with a service specializing in business lodging, such as Engine.

How to calculate tax on your housing stipends: 5 steps

If an employer doesn’t withhold taxes on a housing stipend, the employee is responsible for calculating and paying the necessary tax. Here’s how your employees can estimate what they owe.

1. Determine the taxable amount of your stipend

First, confirm whether the stipend is taxable and classified as a pre-tax, non-taxable, or taxable benefit. If the employer provides a tax-free housing allowance under IRS guidelines, it doesn’t count toward taxable income. Otherwise, the full amount is subject to income tax.

Let’s say an employer offers you a housing stipend so you can choose your own accommodation. Since housing isn’t provided on business premises and your living arrangements aren’t a condition of your employment, the stipend is taxable. The employer must stipulate the stipend amount in your taxable income, and you will pay income tax on it just like a regular salary. 

Additionally, if an employer provides you with a one-off travel reimbursement for lodging, these amounts are generally not taxable. However, per diem allowances should be included in your taxable income. To simplify the process during tax season, be sure to have proof of any travel expense reimbursements.

2. Identify your tax bracket

Since stipends are considered income, they’re taxed at the employee’s marginal rate. The tax rate depends on total earnings and filing status (single, married, filing jointly, etc.). Likewise, higher gross income levels are subject to higher tax rates. 

3. Subtract eligible deductions

Deductions lower taxable income, so employees should subtract standard or itemized deductions to determine their final taxable amount. Hiring a qualified tax professional can help you get the most out of your eligible deductions or even locate some you may have missed.

4. Calculate the income tax owed

Apply the appropriate tax rate to the adjusted income, including the stipend. This will provide an estimate of how much tax is owed on the stipend portion. 

5. Plan for tax withholding or estimated payments

Employees should set aside funds for estimated tax payments if an employer doesn’t withhold taxes on stipends. This helps avoid surprise expenses at tax time. 

How to report a housing stipend

If a housing stipend doesn’t meet the IRS’s non-taxable benefits criteria, the employee must report it, meaning the employee’s federal income tax, Social Security tax, and Medicare tax will apply. 

To report the stipend properly, include the fair market value of the housing on the employee’s W-2 form. The amount should be listed in:

• Box 1: Wages, tips, and other compensation
• Box 3: Social Security wages (up to the wage base limit)
• Box 5: Medicare wages 

If you provide actual housing (not just a stipend), you’ll report the fair market value of that housing in those boxes. You can determine the fair market value of the housing through an appraisal, realtor consultation, or review of comparable properties in the area. If the employee contributes any portion toward housing, deduct that amount.

Lastly, if the stipend isn’t itemized in the employee’s pay stub, notify them so they can plan for tax season accordingly.

Engine helps you arrange your employee housing needs

Tracking travel expenses, ensuring international tax compliance, and managing lodging for employee relocation is a lot to handle. Engine simplifies these processes, helping you search, track, and report booking history and travel expenses in one easy-to-use platform.

Take the hassle out of housing management. Sign up for Engine today and make your next employee relocation or business trip a breeze.