It can be difficult to calculate the exact cost of relocating an employee and their family. While the more obvious expenses like real estate fees and travel allowances can be budgeted for, it’s important to plan for the inevitable hidden costs.
There are many factors to consider, but having an outline of the costs makes it easier to design a relocation budget. We’ve created this helpful guide to suggest what your company can expect to outlay on employee relocation costs.
Relocation Cost Calculation
While the average cost of relocating varies significantly from employee to employee, the following points will make it easier to predict what your company will need to pay for.
Main Employee Relocation Costs
Real estate expenses: If your employee is a homeowner, you may need to think about the real estate charges that come with selling their house and buying a new one. You may also incur fees for breaking a lease if your employee is renting.
House-hunting trips: Your employee will need to find a new place to live, so budget for a few trips ahead of their moving date. Your company will need to pay for travel and accommodation during these trips, so factor in an allowance to cover these expenses. If your budget allows, offer your employee some downtime during one of their house-hunting trips; sightseeing can get them excited about the move during this stressful time.
Moving costs: One of the major expenses to consider is hiring a moving company to pack and transport the contents of your employee’s home. This is typically determined by the type and number of items that need to be moved, but more importantly the distance.
Travel: Your employee’s whole family (including pets) will need to travel on the final moving day. Expect to pay for airfare and transport to and from the airport.
Temporary housing: As is often the case, your employee’s new house may not be ready by the time they arrive, so short-term accommodation at hotels or rental properties might be necessary.
Relevant documentation: Work permits and visas will need to be organized if the employee is relocating overseas, or if you’re hiring somebody that doesn’t live in the US.
Temporary storage: Temporary housing generally lacks storage space, so you may need to cover the costs of additional storage. Storage rental is a competitive market, so shop around before you settle.
Spouse support: Your employee’s partner may need assistance for a new business venture or funding for a job hunt.
Children and dependents: Your employee will be looking for new schools or nurseries for their children. Sometimes, this means providing financial aid or information on schools in the area.
Cultural support: Anybody that relocates knows how difficult it can be to integrate into a new community. Offer your employee language lessons, or enrol the family in an introductory course based on their adopted culture.
Insurance: Moving companies sometimes offer insurance on the items being relocated. While it’s generally a small expense, it’s wise to cover your employee’s personal belongings.
Miscellaneous costs: Driving license fees, pet registration, cleaning services and utility set-up costs are all things that contribute to the bill, and they can add up quickly.
A recent change in tax legislation means that you can no longer submit employee relocation costs as deductibles. It also means that your employee has to pay tax on their relocation benefits, so consider including this tax in the amount you provide them for moving.
There are many ways to manage employee relocation costs—tax included. Some companies prefer to give their employees a lump sum relocation package (more on that below), which is considered taxable income. Your employee will be liable for this tax, so many companies choose to ‘gross up’ their employee’s relocation package.
Here’s an example:
Tim’s Lump Sum—No Gross Up
- Tim’s new employer has offered a lump sum package for his relocation.
- His gross lump sum package is $5,000 and, if Tim falls within the 32% income tax bracket, the net amount for the relocation lump sum would be $3,400. This means $1,600 is lost in tax.
Tim’s Lump Sum—With a Gross Up
- Tim’s new employer has agreed that his lump sum package is $5,000 but to cover his tax burden they gross up his payment to $7,352.
- 32% of his payment is paid in tax, but Tim gets the full $5,000. This costs the company an extra $2,352, but Tim gets the full $5,000 and no unwanted tax bill.
Summary of Relocation Packages
Because every employee is different there is no ‘one-size-fits-all’ package for relocation, but as a standard let’s take a look at the most common packages we use for relocation calculations.
Lump Sum Packages are the usual way to cover employee relocation costs. The employee is given a fixed amount and is responsible for arranging the relocation. This is convenient for the employer, but it has a few downsides; the employee can spend the money as they see fit, and any money left over won’t be paid back to the company.
Tiered Packages are seen as more cost-effective measures. The employee relocation cost is determined by the employee’s position in the company and by their living arrangements. An executive with children will need a package on a higher tier than an intern with no dependents.
A Managed Budget Package is similar to a Lump Sum Package in that the money is given to the employee to handle. The difference is that the expenditure is broken up into sections like housing, travel and moving costs, and any leftover money is returned to the employer.
Often used to relocate high level employees, a Fully Covered Relocation Package allows the company to direct the spending and recover any money that isn’t used. Relocation specialists also use this package to help manage any large, unpredictable employee relocation costs, as the package allows for more flexible spending.
Of course, this is exactly the type of planning that our relocation company helps our clients with.
Planning Your Relocation Budget
Whatever package you decide to use, a relocation budget should always be in the back of your mind. Knowing the average cost of relocating an employee won’t matter if you haven’t planned how to spend the money effectively.
Track your expenditure: After you’ve decided on a budget, allocate amounts to every section and keep track of where the money is being spent.
Adjust your expenditure: Just like relocation packages, every company’s budget will be unique. Adjust your budget according to the size of your company or the size of the industry; smaller companies may need to be more flexible in the way they spend.
Understand your expenditure: When developing a relocation budget, one of the most important things you can do is monitor your spending and recognize how strongly you understand each aspect of the budget. Communicate openly with your employee, and find out what they need and what they don’t.
Reduce the Cost of Relocating
Even with a small budget, there are still ways to cut employee relocation costs without compromising the employee’s experience.
Clearly state what your relocation policy encompasses. Defining what the policy covers helps to keep unforeseen expenses to a minimum. For example, real estate losses when your employee sells their house could be huge if the expense is not limited.
Instead of paying for relocation software, use a management company like ARC Relocation to organize your employee’s transfer. Management companies help you plan the move, giving you more time to shop around for better service providers.
To learn more about the cost of relocation and how ARC Relocation can assist you, read our guide on employee relocation.
In his role as Director of Business Development at ARC Bill oversees all aspects of the growth initiatives for both government and corporate clients, domestically and globally. Bill graduated from George Mason University with a BA in Psychology and has been in the relocation industry since 2000. Bill has earned both his SCRP and GMS designations from ERC. Bill is the former President for the Greater Washington Area Employee Relocation Council (GWERC), ERC content committee member, ERC Ambassador, the recipient of the ERC’s “Meritorious Service Award” and “Distinguished Service Award”.