Need a refresher on how Relocation Tax now works? This guide will help you to gain an understanding of how relocation taxes work for both the business and employee.
Here’s what we will be covering in this article:
- What Changed for Relocation Tax?
- The Difference Between Relocation Bonuses and Reimbursement
- Relocation Lump Sum Tax
- The Tax “Gross Up” Method
- Other Relocation Tax Examples
- Other Considerations
We strongly consider seeking the advice of our industry leading relocation company for any specialist tax information.
Use our Domestic Relocation Cost Calculator to get an estimate of an employee move.
What Changed for Relocation Tax?
Before the Tax Cuts and Jobs Act of 2017, relocation benefits were not considered taxable income for employees. Employers could also deduct relocation expenses incurred when relocating their employees. As a result of the new legislation, employees now have to pay tax on any benefits they receive and employers no longer classify relocation as a tax deductible. There are, however, savvier ways of working to ensure an employer is tax compliant and an employee isn’t stung, creating a smooth and efficient relocation process.
What’s the Difference Between a Relocation Package and Reimbursement?
The relocation package is the option provided by a business to an employee to begin the process. Some employers also offer a relocation signing bonus in addition to the package. Depending on the type of package (some options are Lump Sum, Budget Managed or Tiered Packages), the money is usually paid to the employee once they have accepted the role and the relocation is in its early stage. In reimbursement, an employee covers the relocation themselves and is paid back by the business once the relocation is completed. Receipts are provided, and the business can still outline what the relocation includes.
Relocation Lump Sum Tax
A lump sum payment is when an employer provides the employee with cash or a check to cover the cost of their relocation upfront. It is the employee’s responsibility to pay tax on the money they receive as it is classed additional income on top of their salary.
For example, if a salary is \$80,000 and a lump sum of \$10,000 is provided, the earnings for that year are counted as \$90,000 The employee would not only have to pay their income tax bill on their salary but, a percentage of tax would also have to be paid on the lump sum.
Some employers choose to provide tax assistance, aka “gross up” – more on that shortly – but, if they do not, the employee’s relocation costs could increase to take into account the tax bill they have coming their way.
Tax Brackets and Federal Tax Income depend on various factors:
- Filing Status
- Location (city and/or state)
Did you know… that it’s not just cash payments, bonuses and incentives that are taxable? The cost of the flights, moving fees and any payouts made by a company for accommodation – temporary or permanent – are all taxable?
The Tax “Gross Up” Method
Grossing up is when an employer will increase the amount of the relocation package to help the employee cover the cost of their income tax bill.
It’s more commonly used for lump sum payments however, it can be applied to most forms of relocation packages as demonstrated in the examples below.
Jim’s Lump Sum – No Gross Up
- Jim’s new employer has offered a lump sum package for his relocation.
- His gross lump sum package is $5,000 and, if Jim falls within the 32% income tax bracket, the net amount for the relocation lump sum would be $3,400 – so $1,600 is lost in tax.
Jim’s Lump Sum – With a Gross Up
- Jim’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 Jim gets the full $5,000. This costs the company an extra $2,352, but Jim gets the full $5,000 and no unwanted tax bill.
For a lot of employers, relocating an employee – new or existing – is the best way for them to acquire and retain the best people for the job. Grossing up their payment is the number one way to keep the package look enticing and avoid a negative moving process.
Other Relocation Tax Examples
These examples for reimbursement and relocation packages don’t include a gross up and as you can see get pretty expensive for employees.
- Bertha took on a new role that pays $75,000 and her tax bill would normally reflect this salary.
- Bertha stayed with her business but relocated to a different state.
- She paid for her and her partner’s flight’s which were $500, $150 for her poodle to be transported, $3,000 for a moving company and $1,350 for storage.
- Her employer reimbursed the $5,000 but her tax bill showed that she earned $80,000 ($75,000 + $5,000). Not only does Bertha need to pay more tax, she cannot deduct or exclude her expenses!
Carrie’s Standard Relocation Package
- Carrie’s employer has used a traditional, standard relocation package.
- As part of her package, her employer gave her a $10,000 relocation signing bonus and also paid a moving company $22,000 directly.
- As a result, Carrie’s tax bill will reflect her salary of $90,000 + $10,000 + $22,000, for a total of $122,000 earnings.
- She must pay taxes on that additional $32,000 in relocation benefits. And you guessed it no, she can’t deduct or exclude any of it.
Whether it’s grossing up or reimbursing expenses, everything must be tracked thoroughly. Managing the payments back to the employee and even paying for the services directly can become a long, painstaking process. Allocating this work to a third-party provider with the resources to do this is an option to consider.
You also want to keep the process cost effective for you and the employee. Providing a managed budget and reviewing the different kinds of relocation packages available can mean the difference between a calm, cool process or a panicked new recruit with a rather large tax bill and moving fees.
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”.