Why do employers and HR departments need to know about relocation gross-up? Imagine this: You hire a new employee who is incentivized to join the company, thanks in part to the generous relocation package. But as tax season rolls around, the employee is hit with a curveball—their relocation expenses are taxed, and suddenly, they owe the IRS more than they expected. This surprise tax bill leaves the employee feeling frustrated and a bit betrayed by their employer. A relocation benefit can quickly turn from a blessing to a burden if relocation taxes are not fully understood.
Fortunately, employers can use a relocation gross-up to better support their relocating employees and ensure no one is caught off guard at tax time.
It’s important to note that while we strive to offer valuable information, this is not professional tax advice. Employers are strongly advised to consult with a certified public accountant (CPA) and corporate relocation tax experts for personalized guidance tailored to their specific situation.
What is a Relocation Gross Up?
Relocation gross-up is a critical concept for both employers and employees involved in corporate relocation. A gross-up ensures that employees do not have to pay taxes on their relocation benefits, which have become taxable due to recent legislative changes.
After the Tax Cuts and Jobs Act of 2017, relocation benefits are considered taxable income to the employee, and relocation expenses are no longer tax deductible for employers. This shift means employees are now liable for taxes on their relocation benefits. Learn more from the IRS.
Employers often implement a relocation gross-up to mitigate this additional tax burden on employees. This means the employer increases the monetary lump sum in an employee’s relocation benefits to cover the taxes, so the employee receives the full intended benefit without any reduction due to tax obligations. The relocation gross-up process requires careful calculation to ensure accuracy and compliance with tax regulations.
Example of Taxes on Relocation Benefits
Let’s look at a practical example to understand how relocation gross-up works.
Imagine an employee with a base salary of $100,000 who receives an additional relocation benefit valued at $30,000. As the relocation benefit is taxable, the employee’s total taxable income for the year becomes $130,000.
Since the Tax Cuts and Jobs Act, the $30,000 amount has now been subject to federal income tax and potentially state and local taxes.
Example Gross-Up Calculation:
Let’s assume a simple federal tax rate of 24%. We would calculate the federal tax on the relocation benefit as follows:
- Relocation Benefit: $30,000
- Simple Federal Tax Rate: 24%
- Tax Due on Relocation Benefit: $30,000 x 0.24 = $7,200
Without a gross-up, the employee would be responsible for this $7,200 tax, effectively reducing their net relocation benefit to $22,800.
Why Employers Should Gross Up Relocation Benefits
Employers have several compelling reasons to include relocation gross-up benefits:
Avoiding Tax Surprises: Without a relocation gross-up, employees might face unexpected tax bills come tax season. They may not realize their relocation benefits are taxable, leading to financial stress and dissatisfaction.
Preventing Tax Bracket Changes: Relocation benefits can push employees into higher tax brackets, increasing their overall tax liability. For instance, that $30,000 relocation benefit could push the $100,000 salary into a higher bracket, causing a greater tax burden.
Maintaining the Value of Relocation Packages: Without a relocation gross-up, relocation packages can become liabilities as the tax burden diminishes their value. Employees might feel the financial benefit isn’t worth the inconvenience of moving.
Encouraging Employee Mobility: Negative perceptions of relocation benefits can discourage employees from relocating, hindering company goals that rely on employee mobility, such as expansion or talent transfers.
Grossing up ensures employees receive the full value of their relocation packages, fostering goodwill and supporting the company’s goals.
Which Relocation Expenses Are Taxable
It’s the employer’s responsibility to understand when relocation expenses are taxable and proactively communicate the tax implications of relocation reimbursements to their employees.
Taxable relocation expenses include lump sum relocation bonuses, corporate relocation packages, and managed relocation assistance. For more details on exactly which relocation management options are taxable or deductible, read our article on taxable relocation expenses.
How to Gross Up Relocation For Taxes
Companies have multiple options for calculating relocation gross-up:
Internally: The company’s finance team can calculate the gross-up using payroll software or spreadsheets. This approach allows direct control over the process but requires a detailed understanding of relocation benefits, tax rates, and regulations in many states and countries.
Use an Accountant: Hiring a professional accountant ensures accurate calculations and compliance with tax laws. Accountants are equipped to handle complex tax situations and can provide personalized advice to optimize the relocation gross-up process.
Corporate Relocation Company: Work with an expert corporate relocation company that offers relocation tax assistance to handle the gross-up process. These companies have specialized knowledge in relocation benefits and can accurately streamline the process, reducing the administrative burden on HR and finance teams.
Gross-Up Relocation Formula
On average, employers use a 40% gross-up rate to account for taxes on relocation benefits. To calculate gross-up, employers typically use one of three main formulas:
Flat Relocation Gross Up Formula
The flat method applies a fixed percentage to the taxable expenses and adds it to the income. This straightforward approach may not fully cover the tax liability, as the gross-up itself is taxable.
Formula: Gross Up Amount = Taxable Expenses x Gross Up Rate
Example: For a $30,000 relocation benefit with a 24% gross-up rate:
- Gross Up Amount = $30,000 x 0.24 = $7,200
- Total Benefit = $30,000 + $7,200 = $37,200
Supplemental Relocation Gross Up Formula
The supplemental method compensates for the additional tax created by the gross-up itself, essentially grossing up on the gross-up. This method involves dividing the taxable expense by the total tax rate and subtracting the original taxable expense.
Formula: Gross Up Amount = (Taxable Expense / (1 – Total Tax Rate)) – Taxable Expense
Example: For a $30,000 relocation benefit with a total tax rate of 35%:
- Gross Up Amount = $30,000 / (1 – 0.35) – $30,000 = $16,153.85
- Total Benefit = $30,000 + $16,153.85 = $46,153.85
This method covers the gross-up on the gross-up but may not accurately reflect the employee’s tax bracket.
Marginal Relocation Gross Up Formula
The marginal method accounts for the employee’s income and tax filing status, offering a more precise calculation. This approach typically requires input from a CPA or relocation expert and focuses only on company-earned income.
Formula: Gross Up Amount = (Taxable Expense / (1 – Marginal Tax Rate)) – Taxable Expense
Example: For a $30,000 relocation benefit with a marginal tax rate of 40%:
- Gross Up Amount = $30,000 / (1 – 0.40) – $30,000 = 20,000
- Total Benefit = $30,000 + $20,000 = $50,000
This method is the most accurate, as it incorporates detailed tax information.
These formulas help employers give employees the full intended benefit of relocation packages after taxes. Consulting with tax professionals or relocation experts is highly recommended for accurate calculations and compliance.
Use a Corporate Relocation Company to Gross Up Relocation
Partnering with an experienced corporate relocation company is the best way to ensure the accurate and efficient handling of relocation benefits and tax implications. Experts like our professional team at NRI specialize in navigating the complexities of relocation expenses and tax obligations, ensuring employees receive their full benefits after taxes.
To start determining your company’s relocation benefits and precise gross-up calculations, contact NRI Relocation. We’re here to assist you every step of the way.