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Nicole Overholt

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Don't Confuse Reimbursed Moving Expenses with a Bonus

Posted by Nicole Overholt on Thu, Mar 02, 2017

accounting-resized-600.jpgMany employers offer bonuses or lump sums to employees agreeing to relocate. While this is a welcome benefit, it's important for employers to fully understand the difference between moving expenses and bonuses. Many moving costs are excludable (if paid by the employer) or deductible from the transferring employee's income, which saves them money.

The employer can also save money in payroll taxes. Conversely, bonuses are additions to the employee's taxable income, requiring employers to also pay standard payroll taxes such as Federal, State and FICA.

Our article, Understanding Lump Sum Relocation Packages, will help you make the best decisions on relocation packages for your company.

Moving Expenses

Reimbursements for many moving expenses related to transporting the employee's household goods and personal possessions as well as the family’s final move are excludable from the employee's income when paid by the employer. Common expenses that are excludable from income include:

  1. Moving company direct costs for transporting household and personal goods.
  2. Packing and unpacking household goods and personal property.
  3. Storage costs for up to the first 30 days after the move.
  4. Insurance on the household goods.
  5. Transportation from the employee's primary origin residence to the new location. The employer can reimburse employees that travel by car for any amount, but only the first $0.19 per mile in 2017 (varies each year) is excludable from income.
  6. In-transit lodging.

Bonuses

Employee bonuses are typically paid for one or both of the following reasons:

  1. Employer decides to offer a bonus as an incentive for the employee to agree to relocate.
  2. Employer recognizes that the cost of living is higher in the new location versus the employee's current area.

Bonuses as incentives or payments to defray increased cost of living must not be confused with reimbursing moving expenses. Bonuses, as one-time monetary payments for one of the noted reasons, are treated as additional taxable income. Usually, salary increases (which are more long-term in nature) are easier to understand and accept as taxable income, but what happens if the employee is then transferred to a lower cost of living location?

However, bonuses, even when generated by transferring an employee from one place to another, remain taxable income. Although these incentives or cost of living difference payments are related to the relocation, they are not eligible for income exclusion or tax deduction by the recipient.

Incentives or bonuses are taxable and subject to supplemental withholding regulations. Many companies choose to provide tax assistance (tax gross-up) to further entice an employee to relocation. This can add 45 to 70%+ to the total spent by the company. Management should adopt relocation policies that take advantage of available tax benefits, while offering reasonable, equitable and fair relocation programs for their valued employees.

Reloc

 

 

Topics: relocation benefits, Corporate Relocation Costs, employee relocation expenses

How to Calculate Tax Gross Up

Posted by Nicole Overholt on Fri, Jan 13, 2017

tax-calculator.jpgIt's said that death and taxes are the only certainties in life. I'll leave the answer to that question to the great philosophers. However, one thing is an absolute certainty: taxes are a fact of life.

This is particularly true in the employer, employee relationship. The government requires that the employer withhold taxes from the employee's paycheck. Some would call this wise on the government's part, others wouldn't be so kind. In the corporate world, practically everything is taxed, including aspects of relocation packages provided to employees.  Most relocation expenses associated with a move, whether it is a reimbursement made to a transferee or a payment made to a vendor on the transferee’s behalf, is required to be reported as taxable income to the employee and is subject to IRS supplemental withholding regulations.

Find out more about relocation and taxes in our free guide.

Can you imagine the look on your employee's face when you gently explain that the generous relocation benefits provided will increase his or her tax burden? It is a guarantee, the once happy employee's mood will change quickly and not for the better.  Well, fortunately for these employees, a portion of the tax liability of the relocation package can be covered by tax assistance (gross up) paid by the employer. Unfortunately, grossing up can add 55% or more to taxable relocation costs. If you consider the obvious benefit to the employees’ long-term happiness, it is money well spent.

Basically a tax gross up occurs when the employer adds to the taxable relocation amount to assist with the tax liability of the addition of taxable relocation costs to an employee's income. For example, if the relocation costs include $5,000.00 taxable dollars, the employer may pay a total of $7,500.00 so that the employee gets the full benefit of the $5,000.00, as the estimated taxes of $2,500.00 are paid by the employer. 

If you are in planning a relocation move, getting your hands on IRS Publication 521, "Moving Expenses" and Publication 523, "Selling Your Home," available at www.irs.gov would be a good place to start to fully understand IRS regulations regarding relocation expenses.

3 main ways to calculate a tax gross up

1. Flat Method 

The flat method is a flat percentage calculated on the taxable expenses and then added to the income.  For example, an employer will gross up at a rate of 25% for taxable expenses.  If the transferee is paid $1,000, the gross up would be 25% of this, or $250, and therefore the transferee would receive a benefit of $1,250 total.  Note that the gross up is also considered taxable income and may create an additional tax liability to the transferee.

It’s important to note that this method likely doesn't cover the employee's tax liability since the gross up is taxable income. Additionally, this method is not compliant with supplemental withholding regulations.

2. Supplemental/Inverse Method 

This method is often used because not only are relocation expenses considered income, but the gross up is considered income too.  Therefore employers will pay the gross up on the gross up.  To determine the amount, add up all the tax rates (fed, state, OASDI, SS) and then divide the taxable expense by the sum of the tax rates. Take this number and subtract the taxable expense. 

Supplemental-Inverse Gross Up.png

This methodology covers gross up on the gross up, but may not accurately reflect the tax bracket of the employee.

3. Marginal/Inverse Method

This method is typically handled by a CPA or full-service relocation companies and also incorporates the tax on tax calculation. The difference is this methodology takes into account employee income and IRS Form 1040 tax filing status. In most cases policy dictates that only company-earned income will be considered and other forms of income, such as spousal income or investment income, won't be taken into account.

These three methods represent the nitty gritty of grossing up taxable relocation expenses to assist with the employee's relocation tax liability. While one can do the calculations, it is always wiser to seek the help of an experienced relocation experts.

Free All-Inclusive Guide  Relocation and U.S Taxes

Although this written communication may address tax issues, it is not a covered opinion as described in Circular 230.  Therefore, to ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments), unless expressly stated otherwise, was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matter(s) addressed herein.

Topics: talent retention, tax impact of relocation, calculating tax gross up, talent management

How Payroll Correctly Handles Relocation on W-2 Forms

Posted by Nicole Overholt on Tue, Nov 26, 2013

tax_money.jpgEmployee relocations can have their fair share of tax implications. No other circumstance is quite as worrisome to the employee as the impact that can come about from receiving a lump sum payment to cover their moving expenses. These kinds of lump sum payments are taxable.

Download our free Relocation and U.S. Taxes guide for more helpful information on relocation and taxes.

Minimizing Impact with the Tax Gross-Up

Companies footing the bill for an employee relocation often provide the added benefit of “tax gross-up.” This is done in order to minimize the financial burden that an employee can face when it comes time to file their tax returns. Since lump sum payments for moving expenses are considered taxable income, the tax gross-up is designed to assist in the tax burden caused by the additional taxable relocation costs. Here is how it works:

  • Payout for the employee’s moving expenses is determined.
  • An additional 40 to 70 percent is added to the moving expense amount.
  • When the relocated employee receives his or her W-2 form at the end of the year, the moving expense will reflect the higher amount.
  • After the expense is taxed, the amount of money the employee will have retained should be equal to the originally determined moving expense.

Expenses that Aren’t Reported as Taxable Income

Not every cent that an employer contributes for a relocation impacts the employee from a tax perspective. Taxes apply to the aforementioned lump sum payments, where a company gives the employee a check to use to pay for all of their moving expenses. This can be circumvented if the company is willing to make payment directly for household goods moving expenses. Many times, companies opt for this as a way to minimize stress for the transferee and to simplify tax considerations.

Not all companies offer to do a tax gross-up when it comes to paying for an employee’s moving expenses. For the most part, tax gross-ups are done as a courtesy to minimize impact on the employee – whether that impact is financial, emotional, or otherwise. Transferred employees who find themselves having to dig deep into their own pockets to offset the 40 to 45 percent tax rate imposed on the receipt of lump sum moving expense payments are not often happy employees. Logically, this can have negative consequences when it comes to work productivity, job performance, and seamless assimilation into their new surroundings. Companies whose principal goal in employee relocation is to provide for a smooth transition should consider the above mentioned options carefully – and work closely with their payroll and accounting departments to ensure that no errors are made in filing year-end tax paperwork.

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Although this written communication may address tax issues, it is not a covered opinion as described in Circular 230.  Therefore, to ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments), unless expressly stated otherwise, was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matter(s) addressed herein.

Image courtesy of ddpavumba at FreeDigitalPhotos.net

Topics: tax impact of relocation, Corporate Relocation Costs, calculating tax gross up

The Payroll Tax Impact of Relocation Expenses

Posted by Nicole Overholt on Tue, Nov 12, 2013

taxes.jpg

Paul S., a regional sales manager, had exceeded his sales goals for five consecutive years. When the vice president of sales called him into his office, Paul was surprised to learn his boss wanted him to consider relocating to an under-performing sales territory in the Midwest. Paul's first thoughts were of the many changes – known and unknown – that relocation would bring to him and his family. The impact of relocating on his Federal income taxes was the furthest thing from his mind.

A relocation can bring shock and dismay the following January when W-2 forms are mailed. Your transferee may not have realized many of the relocation expenses your company paid would count as taxable wages. Furthermore, your company will be obligated to remit payroll taxes on those wages.

To prevent unwelcome surprises, a thorough discussion of tax issues should take place during the pre-decision period along with other provisions of your corporate relocation policy.

The IRS allows employees to deduct specific costs of relocating. These specific costs become excludable from income if paid for by the company. These include:

  • Transportation of household goods and personal effects
  • Storage of same for up to 30 days
  • Travel (including en route lodging) from the old home to new location, but excluding meals
  • Out of pocket expenses for gasoline, or mileage at the current IRS rate, parking and tolls.

How your company structures its relocation policy affects the taxes you will pay

Your relocation policy may reimburse transferees for the deductible expenses noted above, and also pay a lump sum relocation allowance to cover non-deductible expenses or provide reimbursement of these expenses. In this case the allowance or non-deductible reimbursements are treated as wages on the W-2, and the company is responsible for withholding and paying all relevant taxes: Federal, State, Medicare, Social Security, etc.

For example, the total cost of relocation in this example is $20,000. Of this, the company would report $3,000 as taxable wages.

Item

Cost

Tax Treatment

Shipment of Household goods

$15,000.00

Excludable; no payroll tax withholding or gross-up assistance required

Travel to new location

$2,000.00

Excludable; no payroll tax withholding or gross-up assistance required

Temporary living expenses at new location (e.g., extended stay hotel)

$3,000.00

Not deductible (taxable); treated as wages; must be taxed

Grossing Up

“Grossing up” adds money to the allowance beyond the “usual” amount to minimize tax consequences for the transferee. Calculations to determine the additional amount can be done in several ways (see here for details), all of which attempt to avoid under- or over-compensating the transferee.

Grossing up a relocation allowance or taxable reimbursements clearly helps the transferee. It also helps your company in the long run: Over half of prospective transferees in mid-sized and large companies declined relocation in recent years as reported by Atlas Van Lines 2015 Corporate Relocation Survey. Grossing up adds an attractive incentive to relocate.

Impact on Your Corporate Tax Return

When your company pays the excludable expenses to a 3rd party or the transferee and doesn’t provide a lump sum for all expenses, you minimize your tax obligations and avoid incurring additional and unnecessary income tax costs.

Structuring your relocation policy to minimize tax obligations is one of many considerations you'll need to make in creating a policy that reflects your overall corporate goals and values.

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Although this written communication may address tax issues, it is not a covered opinion as described in Circular 230.  Therefore, to ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments), unless expressly stated otherwise, was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matter(s) addressed herein.

Topics: tax impact of relocation, Corporate Relocation Costs, calculating tax gross up

Relocation Budget: How to Reduce Costs Within Relocations

Posted by Nicole Overholt on Tue, Oct 15, 2013

As both businesses and consumers become more positive about the post-recession recovery, the economy and jobs picture continues to improve. However, employers are still cautious about hiring and cost control. Businesses can either increase income, lower expenses or, at times accomplish both.

v--crs-kristins-blog_posts-blog_photos-measurement_of_costs-resized-600.jpg

Typically, companies embrace expense control as a consistent effort to improve the bottom line, as businesses can manage costs easier than increasing sales and revenue. Relocation expenses are necessary to attract and keep talent that businesses need. Reducing these costs, while remaining competitive, is a focus of most employers.

Relocation Policy Goals

Common goals, like the four below, apply to most if not all corporate relocation programs. The specific features you adopt will determine the success of your relocation policy. Including features popular with employees in your industry helps you achieve these goals

  • Designing competitive relocation programs to attract and keep valuable employees.
  • Managing relocation expenses and reimbursements.
  • Maintaining low stress levels on HR managers and staff when implementing relocation policies.
  • Treating high-level executives and modest-level staff fairly and equitably.

Reducing Relocation Costs

It’s true!  Proper planning and design helps employers manage relocation program costs. Policies that meet at least two conditions help your program succeed and enjoy cost efficiency.

  • Relocation program "fits" and complements employer's corporate culture.
  • Policy meets primary needs of transferees.

Balancing program competitiveness with relocation costs challenges every employer. Consider the following suggestions to reduce your relocation costs while maintaining an attractive program:

  • Use policy language that clearly defines program benefits. Educate and verify that employees and job candidates understand relocation program features and limitations up front to eliminate future surprises.

  • Establish reimbursement maximums. Evaluate program feature costs to eliminate excess payments and control most expensive relocation components. Capping some reimbursements lowers your costs and promotes adherence.

  • Reduce temporary housing duration and house hunting trips. Both cost reduction techniques still offer transferees benefits without eliminating important features. Using this approach also does not require payment-level reductions to help your company reduce relocation expenses. For example, you could limit temporary housing reimbursement to 30 days versus the 45 to 60 days your policy may now include.

These are tips that some employers successfully use to reduce and control their relocation costs. You may have additional ideas that could help accomplish cost reduction. Just be sure to stay up-to-date with the features your competition offers transferees to ensure that your relocation program remains attractive to employees.

Tracking and Reducing  Relocation Costs

 

Topics: Corporate Relocation Costs, corporate relocation program

Budgets: Providing Relocation Services and Managing Costs

Posted by Nicole Overholt on Tue, Sep 17, 2013

Every business, from the sole proprietorship to a global corporation, has a budget. Whether it's a complex, multi-faceted budget, employing the most exotic, cutting-edge software or written in pencil in a general ledger, business budgets are a necessary reality.

However detailed or simplistic your budget, there are two primary areas of concern: company income and expenses. How you manage both has a direct effect, either positive or negative, on your company's bottom line.

Learn more about developinng relocation policies with our free guide. 

You understand that relocation services are necessary for most businesses, even if the company is a single location employer. Even one-location companies hire people outside of their area at times.

Relocation Budget Challenges

When designing a relocation budget, three or four factors work in tandem or in conflict to create financial challenges:

  • Uncertainty of the number of employees needing relocation services.
  • Predicting the number and type of exceptions to your relocation policy.
  • Inflationary factors that may increase costs of relocation.
  • Policies with home selling assistance involve timing uncertainties and potential shortfalls in selling prices.

Other expenses can increase or decrease your relocation budget line items. Try setting budget amounts for various policy components based on historical company relocation records, understanding the key word is fluidity, since you cannot predict unanticipated costs accurately in advance.

The Balancing Act

All relocation programs involve delicate balancing acts, regardless of company size. On either side of the scale are two issues:

  • Having competitive relocation programs that attract the talent you need and encourage current staff to accept relocation assignments.
  • Managing and controlling costs to stay within budget.

Economic conditions, the job and housing markets, and transfer locations influence the competitive and cost factors of your relocation policy. These factors exist when applying your policies to senior executives or other personnel.

While easier to estimate or cap actual moving costs, expense control difficulty spikes when factoring in changes to domestic or global economic conditions, along with the whims of the employment and real estate markets. These factors can enhance or discourage attracting and keeping the staff talent you need.

Cost-Control Options

  • The simplest way to control costs is to offer a single-tier policy that makes no distinction between executive and non-senior management personnel. However, unless your industry and your competition also offer similar programs, you'll be challenged to attract the best talent. Multi-tier relocation programs are always more attractive to new hires and current employees
  • Many employers find that having third-party professional relocation firms manage their programs offers the best budgetary cost control, while providing transferees with enough attention to increase their productivity faster while minimizing the stress to HR or recruiting staff.

Exercising cost control, while still offering attractive, competitive features, such as real estate assistance, helps you attract the talented employees your company wants. Convincing senior management and financial departments that your relocation policy offers cost containment, along with competitive features, is vital.

Since the recession, some employers are adopting different approaches to control and reduce relocation costs. Offering more short-term assignments than permanent relocations, hiring more telecommuters and setting maximum reimbursements for specific features are among the more popular relocation policy components being employed today. Strive to offer a relocation policy that achieves the goals of attracting the best talent and controlling costs to fit budgetary realities and your strategic objectives.

Save Time & Money Using Tiered Relocation Packages

Topics: Corporate Relocation Costs

Relocation Misunderstandings Lead to Popular Myths

Posted by Nicole Overholt on Tue, Aug 06, 2013

Numerous myths surround corporate relocation policies. Most are based on simple misunderstanding of situations, but these issues can creep into formal policies without the creators realizing they are perpetuating the myths. Consider the following common myths--and address them in your policy.

Popular Myths

  • Temporary housing charges paid directly to corporate housing firms are not taxable for the transferee.

    IRS regulations have changed over the years creating this common misunderstanding by both transferees and employers. Always stay current with tax regulations and changes that sometimes come at a furious pace. If your HR or accounting department find this challenging, consult with your tax advisor or public accounting firm.
  • Reimbursed household goods moving and final move expenses are deductible by transferees.

    These reimbursements must be documented properly to classify as "excludable" from income.
  • Moving household goods and other moving expenses are added to transferee earnings and appear on his or her W-2.

  • Home selling assistance is taxable if the relocation does not satisfy the 50-mile IRS test.

    Interestingly, home sale assistance has its own set of IRS rules. Employers can still qualify for deductibility and transferees can receive tax benefits even if the relocation does not meet minimum mileage test rules.
  • Taxable relocation benefits are reported as transferee income in the new destination jurisdiction.

    Since individuals are on a cash basis accounting system, non-excludable relocation benefits are taxable as of the date the payments were made. Reimbursing transferees prior to final move relocation and beginning work at the new location are taxable in their current--soon to be prior--state.
  • Home buying assistance including points and prepaid interest paid by the employer are deductible by transferees without any tax withholding necessities.

    In most states, mortgage points and other prepaid interest are deductible when someone buys a home. Some employers misunderstand IRS regulations and withhold social security and Medicare taxes only. This misunderstanding can result in employer under-withholding penalties and interest. Further, some companies and rookie tax preparers mistakenly assume that, since the points were paid by employers, transferees cannot deduct them on their federal 1040, Schedule A. This is another myth as the transferee can still deduct up front points if they qualify under prevailing IRS regulations.

These are but some of the most popular myths surrounding corporate relocation policies that may cost employers and transferees unnecessarily wasted money in additional taxes and/or IRS penalties. Misunderstandings such as these can generate extra costs and increased IRS scrutiny for both employer and transferee.

How an Incorrect  Tax Gross Up  Affects Your Transferee
Just as avoiding misunderstanding demands clarity of communication, whether oral or written, these expensive myths require understanding of the prevailing regulations and clear statements in relocation policies. The changing nature of IRS regulations challenge anyone from making "cast in stone" statements of fact regarding what is and is not taxable to transferees or employers.

The best advice is for employers and their HR departments to evaluate relocation policies regularly to ensure the language and benefits fit current regulations to avoid expensive errors. However precise your relocation policy language may be, if it references outdated information or regulations, your program could be in violation, costing transferees and the employer dearly.

Topics: Home Selling and Purchase Assistance, tax impact of relocation, calculating tax gross up

How to Calculate a Tax Gross Up On a Lease Payment

Posted by Nicole Overholt on Wed, Apr 17, 2013

If your corporate relocation program includes monetary help for transferees who rent or lease their residence, a gross up feature that mitigates income tax consequences for relocating employees is a welcome benefit. Prospective transferees in the middle of an active lease will be particularly grateful; at least until they learn that reimbursement to buy-out their remaining lease costs may increase their income tax liability.

Free All-Inclusive Guide  Relocation and U.S Taxes

Relocation program expenses that are not excludable from income (non-taxable) increase transferees' income, making these reimbursements subject to tax withholding. To avoid negative perceptions and eliminate some of the natural stress that accompanies relocation, tax gross up features help attract new talent and keep already high performing employees.

Three Methods to Gross Up Lease Payments

Whether you administer your relocation program internally using your HR department personnel or partner with a top relocation management company (RMC), you'll typically have three options to include a gross up component to help assist with potential tax consequences for your relocated employees.

  1. Simple Gross Up.

    Employers select a flat percentage to add to the direct cost of lease payments offered as help to transferees. This is the simplest method to mitigate potential income tax consequences. However, this technique, while easy to administer, may not help the transferee avoid all potential income tax increases.
  2. The Inverse Method.

    This method can be HR friendly but also ensures the tax assistance benefit is appropriately accounted for and grossed up (tax on tax or gross-up on gross-up).
  3. The True Up Method.

     This method “grosses up the gross up" but also takes into account employee income and filing status to arrive at a more accurate tax rate for each employee. Consider using a tax professional, such as a CPA, tax attorney or RMC, to effectively implement this method.
How an Incorrect  Tax Gross Up  Affects Your Transferee
These three methods can be used for all taxable reimbursed expenses, in addition to lease payments, that generate increased tax liabilities for transferred employees. The techniques herein described, particularly the Inverse and True Up methods, will help you attract new talent and retain historically top performing employees.

Topics: tax impact of relocation, Corporate Relocation Costs, calculating tax gross up

Benefits of Including Gross-Up in your Relocation Plan

Posted by Nicole Overholt on Wed, Apr 03, 2013

tax-calculator.jpgThe more generous and competitive your corporate relocation program, the more likely your transferees may incur a greater tax burden for reimbursed expenses the IRS considers taxable. Your HR department staff can also experience frustration when addressing this often confusing issue.

Gross-up is a commonly misunderstood feature of strong relocation programs. Gross-up methods often depend on the menu of relocation services you offer. 

Find out more about tax gross-up in our free Relocation and U.S. Taxes guide.

Gross-Up

Development of a gross-up policy should be given careful consideration, taking into account benefits offered and company culture.  Some policies are designed to provide basic assistance while others are designed to avoid all or most potential tax consequences of reimbursing relocation expenses.

To avoid overwhelming your HR personnel, it is often prudent to retain a professional third-party relocation firm to track and categorize reimbursed expenses, some of which can generate added income tax consequences for the transferee. These administrative duties can challenge even the most experienced HR veterans, who already have full workloads.

History indicates that, because of changing tax laws and many variations of calculations, most employers benefit from having relocation or tax professionals perform or outline gross-up issues. The benefits of including gross-up features in your relocation plan are numerous and the downsides negligible.

Gross-Up Benefits

  • Accurate gross-up calculations help offset the projected income tax increase with reimbursed relocation expenses.
    With a policy review and gross-up plan, employers may be able to maximize spend by replacing some taxable expense reimbursements with deductible (non-taxable) reimbursements, thus saving money on gross-up.

  • At least three options are available to calculate gross-up.
    Flat gross-up is HR friendly, but may not fully offset the transferee's tax obligations. The supplemental/inverse method can also be HR friendly but ensures the tax assistance benefit is appropriately accounted for and grossed up (tax on tax or gross-up on gross-up). The marginal/inverse method is the more generous technique for calculating gross up amounts. This method “grosses up the gross up" but also takes into account employee income and filing status to arrive at a more accurate tax rate for each employee.

  • Gross-up alleviates a major stress point for relocating new hires and current employees.
    There are numerous stress components involved in a relocation, particularly if the transferee must move a family. Eliminating some of the potential tax burden relieves one of the primary stress activators present in a relocation.

  • Employers can tailor gross-up calculations to better align with the transferee's marginal tax rate based on compensation level.
    Even if you offer only a single relocation program, treating all transferees equally, you can still customize your gross-up calculations to match transferees' different compensation and tax rate levels.

  • Including gross-up features helps attract new talent and reduces turnover of current staff.
    Knowledgeable employees know that not all moving expenses in relocation programs are tax-free. Including gross-up features help you attract better employees and keep current high-performing staff involved in relocation.

In the absence of a gross-up feature, employers are required to withhold on taxable relocation expenses, which puts the tax burden on the transferee. 

While gross-up features will increase the cost of your relocation program, including this component recognizes that you're in competition with other employers for the best available talent. Also, removing as many stress-inducing factors in a relocation is always beneficial.

Working with a top relocation management company (RMC) alleviates stress levels on your HR personnel. Senior management also benefits by not expecting HR staff to become relocation tax experts. Management, able to concentrate on strategy and operations, typically become more productive as they are able to focus on core job responsibilities.

Free All-Inclusive Guide  Relocation and U.S Taxes

Topics: tax impact of relocation, calculating tax gross up

How does relocation assistance affect taxes?

Posted by Nicole Overholt on Tue, Dec 18, 2012

never_too_early_to_prep_for_tax_season-1.jpgWhat are your tax responsibilities when it comes to offering relocation assistance to your employees? What are their responsibilities?

As you might guess, these responsibilities differ somewhat. The following will provide you with a quick overview of how these can differ, and what you can and should do to assist your relocated employees.

Find out more about relocation and U.S. taxes in our free article.

The Difference Between Employee and Employer Taxes for Relocation Assistance

Keep in mind that taxes on relocation assistance will likely be different for you than they will be for your employees. For example, you may not pay any taxes on the costs of providing corporate housing to relocated employees. Your employees, however, usually will, as the IRS usually considers this to be a type of non-exempt employee compensation.

The same may apply to any monetary assistance you may offer. While many employees get away with never paying taxes on a relocation assistance package, other individuals have been made to count this assistance as income and pay federal taxes on it. This is especially true when the assistance is given up front. Their deductions instead came from moving-related expenses.

Relocation-Related Tax Deductible Costs for Employees

Employees can generally deduct the costs of the following when it comes to relocation:

  • Automobile-related expenses: Gas and tolls, plus mileage or the total cost of shipping
  • Lodging paid for in relation to the move
  • Costs of any other forms of personal transportation used (air fare, train fare, etc.)
  • Other transportation costs such as moving vans or pull-behinds
  • Disconnecting and reconnecting utilities (deposits, fees, etc.)
  • Disassembly & reassembly costs for certain items (such as outdoor pools, etc.)
  • Storage fees
  • Packing & unpacking fees including boxes and paid moving assistance

Other Employer Responsibilities

How much tax-related reporting assistance should you provide to your employees when they relocate? That decision is largely up to you. However, it's typically a good idea to help them with their move as much as is reasonably possible.

At one time, employers were required to provide relocated employees with the IRS Moving Expenses Form (4782). While you are no longer required to provide this form, it is a very good idea to provide every employee with an itemized list of any reimbursements you make for moving expenses.

Every employee will also have to attach a copy of Form 3903 to their 1040 tax return form in the spring. You can do each employee a real favor by providing them with a folder that includes these necessary forms, as well as an itemized list of all assistance you have provided.

Keep in mind, however, that each employee's taxes are his or her own responsibility. Unless you are in the tax business, you should refer them to a certified tax professional if they are unclear on any point concerning taxes!

You may also be able to gain tax assistance if you help an employee sell his or her home--or if you buy it outright! As this can vary widely from situation to situation, you should consult a licensed tax professional in the matter.

This will help your business as much as it helps your employees. This kind of above-and-beyond assistance increases employee loyalty and happiness, which makes your business a happier, more productive place to work.

Free All-Inclusive Guide  Relocation and U.S Taxes

 

Although this written communication may address tax issues, it is not a covered opinion as described in Circular 230.  Therefore, to ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments), unless expressly stated otherwise, was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matter(s) addressed herein.

Topics: tax impact of relocation, corporate relocation program, relocation taxes

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