Many employers offer bonuses or lump sums to employees agreeing to relocate. Relocation reimbursement expenses and bonuses are often offered as part of a job relocation packages. While this is a welcome benefit, it's important to understand the difference between relocation reimbursement and bonuses.
Bonuses and reimbursable moving expenses, such as house hunting relocation reimbursements, are additions to the employee's taxable income, requiring employers to also pay standard payroll taxes such as Federal, State and FICA.
Relocation Lump Sum Tax
In a lump-sum bonus program, the employee is responsible for the relocation bonus tax. If employer’s choose not to provide tax assistance (gross-up) a certain percentage is taken off of the total bonus that the employee receives to cover the relocation bonus tax owed to the IRS. For example, if an employee receives a $3,000 relocation bonus and the IRS collective tax rates (Federal, State and FICA) total is 30%, $900 is taken out of the bonus to cover the tax and the employee receives $2,100.
Employer Paid Moving Expenses
Common moving expenses related to transporting the employee's household goods and personal possessions as well as the family’s final move include:
- Direct moving company 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.
- In-transit lodging.
Difference Between Relocation Reimbursement & Bonuses
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 that are the result of a job relocation. 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 reimbursement policies that take advantage of available tax benefits, while offering reasonable, equitable and fair relocation programs for their valued employees.
- IRS Publication 521: https://www.irs.gov/pub/irs-pdf/p521.pdf
- IRS Publication 15: https://www.irs.gov/pub/irs-pdf/p15.pdf
- IRS Publication 15-B: https://www.irs.gov/pub/irs-pdf/p15b.pdf