Tax gross-up can add considerable costs to corporate relocation packages. Tax gross-up can increase taxable relocation costs by 45% to 55% or more.
What is tax gross-up, in a nutshell, and why does it cost your company money? Tax gross-up occurs when you add to the taxable reimbursement amount so that relocating employees don't face a tax liability after receiving one-time relocation incentives or reimbursement of their taxable relocation costs. It's standard practice to offer tax gross-up, as it adds to employee satisfaction, makes a move easier on relocating employees, and can provide added incentive for employees on the fence to make the decision to relocate.
Calculating Tax Gross-Up
You can calculate tax gross-up in three ways:
1. Simple Gross Up: A simple gross-up simply adds a percentage to the reimbursement costs based on the employee's tax bracket or another figure. Since this additional percentage is also taxed, however, it could still result in a tax liability for the employee.
2. The Inverse Method: This is a more accurate, albeit slightly more complicated, method to calculate tax gross-up. Begin with the number one and subtract the tax rate, then add that percentage to relocation costs. This compensates for the tax on the gross-up, but is not 100% accurate.
3. The True Up Method: Performed by a CPA or a relocation management company, this tax gross up calculation provides the most accurate results.
While tax gross-up adds to your corporate relocation costs, it results in a more fair corporate relocation package, happier employees, and better retention rates.