Tax gross-up is a topic that relocation professionals routinely speak about among themselves but sometimes do not discuss adequately with relocating employees. Gross-up is a complicated subject and we sometimes wrongly assumed that tax discussions should be saved for the tax professionals—particularly if the employer is providing that service.
What is gross-up or tax assistance? In simple terms, an employer agrees to defray the taxes owed on a relocation benefit(s) on behalf of the transferee / assignee.
In effect, the amount paid to the transferee is a larger gross amount, to include the additional taxes due, so that the net amount of the payment is equal to the intended benefit.
It is common for employers to gross-up or cover the taxes owed on many standard relocation benefits as a show of goodwill, to maintain the competitiveness of their relocation packages and to attract and retain talent. On average, employers use 40% as the average gross-up rate to protect transferees for Federal taxes.
Here is an example of a gross-up calculation:
The cost of 60 days of temporary housing to Transferee X is $7,145.58
The employer of Transferee X estimates the federal tax owed on the $7,145.58 by multiplying it by 40%. $7,145.58 x 40% = $2,858.23
Add the cost of the temporary housing to the estimated owed federal tax to arrive at the total cost of this benefit for the employer on behalf of Transferee X. $7,145.58 + $2,858.23 = $10,003.81.
In the U.S., the IRS considers most relocation benefits to be taxable income. This makes it even more imperative to discuss tax considerations when an employee is offered a permanent relocation or temporary assignment. If the employer is not offering tax assistance, this discussion becomes even more important as it can determine whether the employee accepts the relocation.
Some companies will offer tax assistance only on select mobility benefits. For example, it is considered best practice NOT to offer tax assistance on a relocation (or miscellaneous) allowance. Others might provide a lump sum as the only relocation benefit and the company may or may not offer tax assistance on the lump sum. The decision to tax assist or not can dramatically change the usage of a relocation benefit.
The employer, through corporate payroll, is responsible for withholding and paying the taxes on any relocation benefit that they paid on the employee’s behalf and that is considered to be income to the employee. Employees can be surprised at the gross income reported on their W2 form if they haven’t been counseled well on the taxability of the relocation benefits. The gross income amount on the W2 will be an inflated amount from the employee’s normal gross annual salary due to the inclusion of the costs of all of the taxable relocation benefits. However, if the employer initiated tax discussions when the relocation was first proposed, the employee should have a working understanding of the concept and be prepared for his or her annual W2.
Relocation Tax and the Mobile Workforce will cover:
- Relocation Tax Best Practices
- Tax Guidelines for Homesale Assistance benefit
- Relocation Policy components and Taxability