Preparing for Relocation Tax Challenges in 2025

Corporate relocation has always been an important tool to facilitate business growth, allowing companies to leverage diverse skill sets and fuel growth and innovation organization-wide. For employees, relocation often brings opportunities for career advancement, personal growth, and new life experiences. But alongside these benefits comes a maze of relocation tax challenges that can complicate even the best-planned moves.

For employers, staying compliant with U.S. tax regulations surrounding relocation benefits is essential to avoid penalties and ensure a smooth transition for relocating employees. For employees, the tax implications can significantly impact their financial situation, particularly in the wake of the 2017 Tax Cuts and Jobs Act (TCJA).

In addition, the rise of remote work and the increase in employee-driven (vs. employer-driven) relocations have introduced new issues. HR professionals and business leaders must remain proactive and well-informed to manage these challenges effectively.

In this blog, we’ll discuss the most significant U.S. tax issues in the employee mobility industry and offer practical solutions to navigate these complexities efficiently. It will equip you with a clear understanding of relocation tax risks, how to mitigate them, and the strategies you can use to optimize your global mobility policy.

Tracking Remote Workers and Tax Implications

Employers must closely track where their employees work, especially as remote and out-of-state work becomes more common. Many businesses have staff members working outside the state where the company is based. However, suppose a company lacks a legal presence in a particular state, and even one employee begins working from there. In that case, it can trigger tax compliance issues, including potential liabilities for the business.

Likewise, employees may face double taxation if they work in a state other than where their employer is located. To avoid these complications, it’s advisable to consult a tax professional to determine whether reciprocal income tax agreements exist between the relevant states.

Changes in Buyer’s Agent Commissions and Their Impact on Relocating Employees

Previously, it was common practice for sellers to cover the buyer’s agent’s commission in a real estate transaction. However, as of August 17, 2024, the National Association of Realtors (NAR) lawsuit settlement stipulates that sellers are no longer required to pay the buyer’s agent’s commission. This means that relocating employees may now be responsible for paying some or all of their buyer’s agent’s commission, adding another layer of cost to the home-buying process.

Employers must decide whether to cover these buyer’s agent commission costs as part of the relocation package. However, it’s important to note that any assistance the employer provides will be considered taxable income for the employee, so the employer will also have to decide whether to tax-assist this benefit.

Anticipating the Expiration of the Tax Cuts and Jobs Act (TCJA)

The TCJA expires on December 31, 2025. President-elect Trump and congressional Republicans have signaled their desire to extend or expand this legislation, which they can do with a simple majority under budget reconciliation procedures.

The “pay-fors” for this act included a $10k cap on the SALT (state and local tax) deduction and eliminating the moving expense deduction. Trump and legislators from high-tax states have called for the elimination of the SALT cap, and it will automatically expire at the end of 2025 if no action is taken.

The relocation industry has lobbied against the SALT cap, as it makes moving to and living in these states less attractive to relocating employees. The industry has also lobbied for the restoration of the moving expense deduction, though the fate of this provision is still unclear.

Some concerns already exist about the cost of the various tax breaks being discussed, so nothing is cast in stone.

Preparing a Flexible and Responsive Relocation Tax Strategy

In today’s dynamic tax landscape, preparing a flexible and responsive relocation tax strategy is essential for organizations striving to provide a smooth, compliant, cost-effective relocation experience. A well-thought-out tax strategy ensures that employees receive the necessary support to transition seamlessly and protects the organization from unexpected financial and compliance risks.

Here are some tips for developing a relocation tax strategy that is both adaptive and proactive.

1. Understand Tax Implications on Relocation Benefits

The tax treatment of relocation expenses varies by jurisdiction, and it’s critical to recognize which benefits are taxable and how that impacts both the employee and the employer. Critical components of relocation that often carry tax implications include:

• Moving expenses
• Temporary housing and per diem allowances
• Home sale and purchase assistance
• Storage and shipment of goods
• Cost of living adjustments

Action Step: Regularly review tax regulations in the jurisdictions where you operate to identify which relocation benefits are taxable. Engage tax professionals to evaluate potential financial exposures and ensure compliance.

2. Implement Tax Gross-Up Strategies

A gross-up policy reimburses employees for the tax burden of relocation benefits, ensuring they don’t face unexpected out-of-pocket expenses. However, gross-up policies can be complex and costly, requiring careful planning.

There are several tax gross-up methods to consider, including:

• Simple Gross-Up: Adds a percentage to the taxable benefit to cover taxes.
• Tiered Gross-Up: Adjusts the gross-up based on employee level or benefit type.
• True-Up Gross-Up: Ensures exact tax reimbursement based on an employee’s unique tax situation.

Action Step: Design a gross-up strategy that aligns with your budget and company philosophy. Periodically evaluate its effectiveness to ensure it meets company objectives and employee needs.

3. Prepare for Remote Work and Cross-Border Tax Compliance

With the rise of remote work, relocating employees may need additional tax considerations, especially for assignments crossing state or national boundaries. A proactive tax strategy will include:

• Payroll tax considerations for multi-state employees
• Residency rules and potential double taxation issues
• Tax credits and deductions available in certain jurisdictions

Action Step: Implement tax compliance tracking for remote or international employees to identify potential tax exposures or liabilities early on.

4. Adopt Technology for Real-Time Tax Analysis

Tax regulations are continually evolving, making it essential to monitor and adapt to changes quickly. Technology solutions—such as automated tax calculators and compliance software—allow for a responsive tax strategy by providing real-time insights into cost implications and regulatory changes.

Action Step: Invest in relocation management software with tax analysis tools. These tools can automatically calculate tax burdens based on up-to-date tax rules and help you adapt your strategy as regulations change.

5. Collaborate with Tax and Legal Experts

A flexible tax strategy benefits from the insights of tax and legal experts. A collaborative approach lets your team stay current on relocation tax trends, minimize risks, and proactively manage compliance.

Action Step: Engage tax and legal consultants with relocation expertise. Schedule periodic reviews to assess the strategy’s responsiveness to regulatory changes.

6. Educate and Communicate with Employees

Transparent communication regarding relocation-related taxes is crucial for maintaining employee satisfaction. Ensuring employees understand their tax liabilities and the support provided can significantly reduce stress and foster trust.

Action Step: Develop communication materials, such as FAQs and tax planning guides, to help employees navigate relocation tax complexities. Regularly update these materials to reflect any tax changes.

7. Monitor and Adapt the Tax Strategy Regularly

Tax strategies must evolve with organizational changes, regulatory updates, and employee needs. Periodic evaluations allow you to adjust your approach, ensuring it remains effective and cost-efficient.

Action Step: Conduct annual or bi-annual reviews of your relocation tax strategy. Solicit feedback from relocated employees and incorporate industry best practices to improve your program continuously.

FAQs on Relocation and Tax Planning for 2025

“How can employers avoid triggering tax compliance issues with remote workers?”

Employers can take several proactive steps to avoid triggering tax compliance issues when managing remote workers, especially as employees may be working across multiple jurisdictions:

1. Understand Multi-State Tax Laws: If employees work remotely in states different from the company’s primary location, employers may be responsible for withholding state income taxes and potentially paying other state-specific employment taxes. Each state has different rules regarding nexus (the degree of business presence that requires tax obligations), so it’s essential to understand and comply with each state’s regulations where employees are located.
2. Set Clear Remote Work Policies: Having a well-defined remote work policy that specifies the locations where employees are allowed to work can help employers limit exposure to tax obligations in multiple jurisdictions. Some employers specify approved states or countries for remote work based on tax and compliance feasibility.
3. Monitor Employee Work Locations: Tracking where remote employees are physically working can help manage tax risks. Some companies use digital tools or require employees to inform HR or payroll when they work from a new location. This prevents employees from working in locations that might have unforeseen tax consequences.
4. Coordinate with Payroll and Legal Departments: In-house or outsourced payroll teams should be aligned with legal teams to ensure payroll taxes are correctly calculated for each employee’s work location. This may include withholding for state and local income taxes and ensuring compliance with unemployment and disability insurance requirements.
5. Stay Informed About International Tax Compliance: For companies with remote employees in other countries, understanding each country’s employment tax, income tax, and social security requirements is crucial. In some cases, having a remote worker abroad could create a “permanent establishment” in that country, leading to corporate tax obligations. Consulting with a global tax advisor is often beneficial.
6. Consider Using an Employer of Record (EOR) for International Employees: EOR services can help companies manage tax and compliance for remote employees working in foreign countries by legally hiring the employees in-country and handling tax obligations on the employer’s behalf. This is particularly useful if the employer has only a few employees in certain countries.
7. Regularly Audit Employee Tax Withholding and Reporting: Conduct periodic audits of employee tax withholding, especially for remote workers, to ensure that the correct amounts are being withheld and reported. This helps to catch any compliance issues early before they lead to penalties.
8. Keep Up to Date on Changes in Tax Laws: Tax regulations for remote work are evolving, especially as more employees continue to work remotely post-pandemic. Employers should regularly consult with tax professionals or use automated tax compliance software that can adapt to regulatory changes.

“What are reciprocal income tax agreements, and how do they affect remote employees?”

Reciprocal income tax agreements are arrangements between states that allow employees to work in one state and live in another without having to file tax returns in both states. These agreements simplify tax obligations for workers who live in one state but commute to work in another by enabling them to pay income tax only to their state of residence.

How Reciprocal Agreements Affect Remote Employees: 

1. 1. Single-State Income Tax Filing: Under a reciprocal agreement, employees pay income taxes solely to their state of residence. For example, if an employee lives in Wisconsin but works remotely for a company based in Illinois, they would only owe state income tax to Wisconsin and would not need to file a tax return in Illinois.
   2. Tax Withholding Simplification: Reciprocal agreements simplify payroll processes for employers. Employers only need to withhold income tax for the employee’s state of residence, simplifying payroll and withholding and reducing potential compliance issues.
   3. Reduced Tax Liability and Filing Complexity: Remote employees benefit by avoiding filing multiple state income tax returns. This minimizes tax liabilities and avoids double taxation or the complexity of claiming tax credits for taxes paid to another state.
   4. Potential Limitations for Fully Remote Employees: While reciprocal agreements often help commuters, their application can vary for fully remote employees who rarely, if ever, travel to the state where the company is based. Some states may consider the employee’s “tax home” as the primary determinant, and residency rules may take precedence.
   5. Limitations in Non-Reciprocal States: Employees who live and work across non-reciprocal states may still face dual tax filing requirements. In these cases, the employee usually pays taxes to both states but can often claim a tax credit in their home state for taxes paid to the work state, reducing but not eliminating the impact of dual taxation.
   6. Changes Due to Increased Remote Work: With the rise of remote work, states may revisit or amend reciprocal agreements. Some states may become stricter about enforcing non-resident tax rules to capture revenue from out-of-state remote employees, so it’s beneficial for employees and employers to stay informed on state tax requirements and any changes to existing reciprocal agreements.

Reciprocal income tax agreements benefit remote employees who live in one state and work in another by simplifying tax filing requirements and avoiding dual tax liabilities. However, remote workers in non-reciprocal states may still face multiple tax obligations, and it’s essential to consult with tax professionals to manage compliance effectively.

“Will the potential extension of TCJA impact all employees equally?”

The potential extension of the Tax Cuts and Jobs Act (TCJA) would not impact all employees equally; the effects would vary based on individual income levels, family situations, and other personal factors. Key considerations include:

1. Income Levels: The TCJA’s provisions, such as reduced top marginal tax rates and increased estate tax exemptions, have benefited higher-income individuals more. Extending these provisions would continue to favor higher earners. Conversely, lower—and middle-income employees might see less pronounced benefits.
2. Geographic Location: The TCJA’s $10,000 cap on SALT deductions has affected employees in states with high state and local taxes (SALT). Extending this cap would continue to impact these individuals, potentially leading to higher effective tax rates than those in states with lower taxes.
3. Family and Dependents: The TCJA increased the standard deduction and expanded the child tax credit, benefiting families with dependents. Extending these provisions would continue to provide tax relief to such families, whereas single filers without dependents might experience different effects.
4. Employment Type: The 20% deduction on qualified business income introduced by the TCJA has benefited self-employed individuals and owners of pass-through entities. Extending this provision would continue to benefit these taxpayers, while traditional employees receiving W-2 wages would not be directly affected by this specific provision.

“What happens if my company decides not to cover the buyer’s agent commission costs?”

TRC Consulting Services has determined that most companies are covering buyer’s agent commission costs on an exception basis if the seller opts not to pay them. If your employer does not cover the buyer’s agent commission costs, you will be responsible for paying this commission. This can be a significant expense, typically around 2-3% of the home’s purchase price.

Under new NAR rules, buyers must sign a written agreement with their agent before touring a home, whether in person or virtually. The agreement must include the amount or rate of compensation and disclose that broker commissions are negotiable.

Depending on the market, buyers might have some flexibility to negotiate a lower fee. In competitive markets, agents may be less likely to negotiate down, whereas in slower markets, there might be more room to adjust the fee.

You can also opt to view only properties for which the seller is paying the buyer’s agent commission, but this will limit your choices in a competitive market.

Conclusion: Staying Ahead in a Complex Relocation Tax Environment

U.S. domestic tax issues present substantial challenges for the mobility industry, requiring meticulous planning, strict compliance, and constant vigilance regarding regulatory changes. To navigate these complexities, employers must address state and local tax (SALT) considerations, meet withholding and reporting obligations, and optimize employee benefits and compensation packages. Staying informed about evolving tax legislation is critical for maintaining compliance and ensuring tax efficiency.

Collaboration with relocation management companies, tax professionals, and advanced technology solutions can help streamline tax-related processes, reducing the burden on all stakeholders and enhancing the overall mobility experience.

Download the latest TRC ebook, Global Mobility Tax: Essential U.S. Tax Considerations for Employee Mobility Success.