It’s common practice for employers to offer a relocation bonus or relocation reimbursement in exchange for employees relocating. These are usually part of an overall “relocation package” that the company offers. Your company likely offers something like this but it’s important to understand the distinction between relocation bonus vs. relocation reimbursement because they have different implications and benefits to the employee.
This quick guide will help you assemble the proper relocation bonus package that will benefit both you and your relocating employees.
What is a Relocation Bonus?
The term relocation bonus takes on many different names. Some companies call it a lump sum bonus, some call it a cash allowance, your company may call it something else. Essentially, it’s when the company provides each relocating employee with a fixed amount of money based on many determining factors. Some of these factors include:
- Higher cost of living in the new location
- House hunting expenses
- Moving expenses
- Breaking of a lease
The main thing to remember about the relocation bonus is that it’s all at once and completely on the back of the employee to manage the money properly to make the relocation work. Of course, you can provide counsel and assist them with finding affordable moving companies and accommodations but ultimately, it’s up to the employee to manage the money.
You can see how this could quickly backfire and become a problem for employees who may be irresponsible with their money or inexperienced with moving. This is especially true if the relocation is far away.
What is a Relocation Reimbursement?
In the case of a relocation reimbursement, this package requires the employee to pay for all of their relocation expenses knowing that the employer will reimburse them a predetermined amount of money after the relocation is complete. In many cases, the employer will cover all of the expenses but it’s up to you and the employee to determine what a fair reimbursement package will include.
As you can likely tell, there are some standout issues with relocation reimbursement as well. First, it requires the employee to keep receipts for everything and this can quickly become confusing and messy if you’re managing receipts for dozens of employees. Keeping track of everything and ensuring that the company isn’t overpaying will become the name of the game here.
The other issue is the fact that many of your employees may not have the money to pay for the move up front without some financial assistance. This could put them in a difficult situation because they may want to relocate but they don’t want to spend their last dime on moving expenses and worry about how quickly you’ll reimburse them.
They may also not want the company knowing that much about their financial situation and as an HR professional, you know that you can’t ask for that information anyway. By choosing this route, you may end up not being able to relocate some of your best employees because they simply can’t afford the move.
Highlighting the Differences
While we touched on them in the previous sections, let’s highlight the pros and cons between relocation bonus vs. relocation reimbursement.
Relocation Bonus: Pros
- Predetermined amount of money makes less work for the HR department
- Employee gets their money upfront so they don’t have to spend their own
- Employee can manage that money by budgeting out enough for certain expenses
- Employee may even have money left over if they spend wisely
Relocation Bonus: Cons
- Requires the employee to manage their money
- Requires the employer to determine the relocation bonus amount upfront
- Money may run out before the employee covers all the expenses
Relocation Reimbursement: Pros
- Less upfront work for the HR department
- Easier to develop an accurate relocation package when you see how much it costs
Relocation Reimbursement: Cons
- Employees may not have enough money for the relocation
- Managing receipts and keeping track of large scale relocations could become a challenge
Relocation Bonus Tax Responsibilities
Another important factor for choosing a relocation bonus vs. reimbursement is the tax responsibilities. You should understand these when assembling the packages and determining which route you’ll go.
When you offer a lump sum relocation package, the employee is responsible for paying taxes on that bonus as if it was extra income. Make sure to communicate that with them so they’re prepared for that. You as the employer also need to coordinate your package properly to allow for that tax to come out of the bonus amount while still leaving enough money to cover the expenses.
For example, if you’re offering $5,000 to every relocating employee but 30% of that comes out in taxes, that would only leave them with $3,500. You would have to make sure that the remainder covers their move.
You can also choose to provide relocation tax assistance where you as the employer take a little bit off the top to cover the relocation bonus tax.
Here are some of the most common questions associated with relocation bonus vs. relocation reimbursement.
How much tax is deducted from a relocation lump sum allowance?
You, the employer, are responsible for withholding state and federal taxes from the bonus amount. As a result, you can increase the total amount of the bonus to counteract what the employee will lose in taxes. This can range anywhere from 25-50% depending on your state, municipality, and the allowance amount.
How much is the average relocation package?
This number can vary dramatically from $5,000 to $75,000 depending on the employee. A manager who has worked for the company for 25 years has made roots where they live and will likely have a much more challenging (and expensive) move. Employees that own homes vs. those who rent will also jack up the package cost.
What moving expenses are reimbursable?
Expenses include but are not limited to packing, transporting, moving costs, airfare, fuel, breaking leases, disconnecting and reconnecting utilities, house hunting, vehicle wear and tear, and much more. It’s ultimately up to you to determine what expenses are most crucial for your employees.
Are relocation bonuses paid up front?
Yes, this is the main difference between a relocation bonus vs. relocation reimbursement. The bonus is paid upfront so the employee has their money to budget out over the course of their move.
Choosing between one of these two packages will be one of the biggest decisions you’ll have to make. A relocation bonus vs. relocation reimbursement is not a simple choice, and it’s one you’ll want to make carefully. We recommend communicating with your employees and getting them involved in the decision. Keep in mind, this is a big step for them as well.
For help with this decision or to learn more about assembling a relocation package, contact us today. We can help ease the stress of relocating employees so the process runs smoothly and efficiently.