Accurately handling relocation on W-2 forms is essential for payroll administration and compliance. In this comprehensive guide, we delve into the proper procedures and best practices to ensure seamless management of employee relocations. Whether you are an HR professional or a payroll administrator, this article provides valuable insights to help you navigate the complexities of W-2 reporting for relocated employees.

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 lump sum payments, where a company gives the employee a check to use to pay for all 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.