Many 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.
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:
- Moving company direct costs for transporting household and personal goods.
- Packing and unpacking household goods and personal property.
- Storage costs for up to the first 30 days after the move.
- Insurance on the household goods.
- 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.
- In-transit lodging.
Employee bonuses are typically paid for one or both of the following reasons:
- Employer decides to offer a bonus as an incentive for the employee to agree to relocate.
- 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.