CapRelo Blog

The Payroll Tax Impact of Relocation Expenses

Posted by Nicole Overholt on Tue, Nov 12, 2013

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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

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