Relocating for work brings many expenses, from selling a home and moving personal belongings to securing temporary housing at the destination. Many employers provide relocation assistance to ease this financial burden and make the move more enticing. Unfortunately, this employer-provided assistance comes with an added tax burden.
Today, most relocation expenses covered by an employer—except for specific BVO/GBO homesale programs—are treated as taxable income by the IRS, state tax authorities, and local governments that impose income taxes.
Before the Tax Cuts and Jobs Act of 2017, taxpayers could deduct some moving expenses and exclude employer reimbursements for qualified moving costs. However, under current law, these deductions and exclusions have been eliminated for most taxpayers, except for active-duty military personnel.
The value of any employer-provided relocation benefits, whether cash payments or services rendered, is added to the employee’s W-2 statement, increasing the employee’s taxable income and the tax due. To address this, many employers choose to “gross up” their relocation benefits, effectively covering the taxes so employees can receive the full intended value of the relocation package.
Grossed up taxes can be confusing whether you’re an HR professional managing relocation programs or an employee trying to understand your tax obligations. In this blog, we’ll tackle the top ten questions we receive about grossed up taxes to give you a better understanding of this critical aspect of relocation benefits.
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What does “gross-up” mean in the context of relocation benefits?
A gross-up is an additional payment made by an employer to cover the taxes an employee owes on company-provided relocation benefits. Without a gross-up, employees could lose a significant portion of their relocation benefit to taxes.
Here’s how it works:
Suppose an employee receives a relocation benefit worth $10,000. If this amount is subject to a 30% tax rate, $3,000 would go toward taxes, leaving the employee with only $7,000. To ensure the employee keeps the entire $10,000, the employer “grosses up” the payment by covering the $3,000 tax due.
Gross-ups demonstrate an employer’s commitment to supporting employees during a move, ensuring they can focus on the transition without added financial stress.
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I’m moving at my company’s request. Why are my relocation benefits taxable?
The IRS generally treats relocation benefits as taxable income because they represent a financial gain to the employee. The IRS classifies most reimbursements, allowances, and payments for relocation expenses as taxable unless they qualify under specific exemptions (which apply primarily to active military personnel).
Taxable relocation benefits typically include the following:
- Lump sum payments
- Household goods transportation
- Reimbursed real estate commissions
- Reimbursed closing costs
- Temporary housing allowances
- Miscellaneous allowances
- Reimbursed lease cancellation fees
- Final move transportation costs (e.g., airfare, lodging, and meals)
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Which relocation expenses are usually grossed up?
Employers generally gross up some or all taxable benefits under IRS rules. This eliminates or at least reduces unexpected tax bills.
Some commonly grossed-up expenses include:
- Lump Sum Payments: Often provided upfront for employees to cover relocation expenses as they see fit.
- Temporary Housing: Employee allowances or direct payments to providers for short-term accommodations.
- Final Move Expenses: Costs associated with transportation, lodging, and meals during the move.
- Home Sale Assistance: Reimbursements for commissions, home sale losses or closing costs.
- Lease Cancellation Fees: Payments to cover penalties for breaking a rental agreement.
- Miscellaneous Allowances: Payments for incidental costs like utility setup or vehicle registration.
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How is the gross-up amount calculated?
The calculation for grossed up taxes can vary depending on the method used and the applicable tax rates. At its core, the calculation involves determining the taxes owed on the benefit and either adding that amount to the payment or remitting the grossed-up taxes directly to tax authorities.
Employers often rely on specialized gross-up calculators or payroll software to ensure accuracy, especially when multiple tax rates and jurisdictions are involved.
Here’s a basic example:
If an employee is given a $10,000 benefit and their combined tax rate (Federal, state, and local) is 30%, the employer would calculate:
- Taxes owed: $10,000 x 30% = $3,000
- Gross-up amount: $3,000
The grossed-up benefit would total $13,000, ensuring the employee receives the entire $10,000 after taxes.
Here’s an example of the employer covering the tax due on the gross-up payment:
Inez is set to receive a $5000 bonus and a $10,000 lump sum toward her moving costs. Inez’s employer pays an additional $ 5,500 to the IRS on Inez’s behalf. This $5500 consists of the $4500 tax due on Inez’s relocation benefits plus the “tax on tax” of the gross-up benefit. Inez receives the entire $15,000 she expects, with her employer already covering the taxes.
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Are all employers required to gross up relocation benefits?
While it is considered typical and best practice, employers are not obliged to gross up relocation benefits. Gross-up payments can be one of the employer’s most significant relocation expenses, so some employers compromise and gross up only some relocation benefits.
Why most employers choose to gross up:
- To attract and retain top talent.
- To enhance the overall employee experience during a challenging life transition.
- To remain competitive with other companies offering robust relocation packages.
Why some employers don’t:
- Gross-ups can significantly increase the cost of relocation programs.
- Small or budget-conscious organizations might not have the resources to offer this benefit.
- Employers might prioritize other types of relocation assistance, such as higher lump sum payments or more comprehensive moving assistance.
Employers choosing not to gross up should ensure employees know taxes will be withheld from the expected payments. If the employer makes payments on the employee’s behalf, such as paying a moving company directly, the employee might have additional taxes due at tax time.
- Is grossing up beneficial for employees?
Yes. Receiving gross-up payments has no downside for employees. Relocation benefits come with tax obligations; without gross-up, employees could face financial strain. Grossed up taxes makes relocation benefits beneficial rather than a potential liability.
Benefits of gross-ups for employees include:
- Full Utilization of Benefits: Ensures employees receive the intended financial support for their move.
- Reduced Stress: Employees don’t have to worry about setting aside money to cover taxes.
- Financial Equity: Gross-up levels the playing field for employees in higher tax brackets, ensuring fair support.
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How do gross-ups impact the employee’s tax filing?
While grossed-up amounts help ensure employees aren’t out of pocket for taxes, they are still considered taxable income and must be reported on the employee’s W-2 form. This means gross-up increases the employee’s taxable income, which can:
- Push employees into a higher tax bracket.
- Affect income-based calculations, such as loan eligibility or tax deductions.
The key advantage is that the employer has already accounted for the additional tax burden, so employees typically owe little or no additional tax on the relocation benefit.
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What are the different types of gross-up methods?
Employers can choose from several gross-up methods, each with advantages and complexities. Gross-up payments themselves are taxable, so companies must decide if they will gross up the gross-up. Standard gross-up methods include:
- Flat Method:
- The company sets a universal rate and applies it to all gross-up calculations.
- The employer does not attempt to reimburse the additional gross-up (tax on tax) amount.
- Simple and predictable but may over- or under-compensate employees based on their tax rates.
- Supplemental/True-Up Method:
- A more precise rate based on actual Federal, state and local government withholding rates.
- Involves calculating the gross-up amount at the time of the relocation expense and again at year-end before W-2 earnings are reported.
- More accurate but requires additional effort and payroll coordination.
- Marginal/Inverse Gross-Up Method:
- A more employee-specific rate that considers the employee’s income and filing status.
- Uses the employee’s marginal tax rate to determine the gross-up amount.
- Starts with the net benefit the employee should receive and calculates backward to determine the grossed-up amount.
- Accounts for the additional gross-up amount when calculating the reimbursement.
- Ensures precise alignment with the employee’s desired net benefit.
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Do grossed-up amounts affect my total compensation?
Yes and no. Relocation benefits and gross-ups increase taxable income for the year the relocation benefits are received. However, they are typically not considered part of the base salary or annual compensation.
What this means for employees:
- Gross-ups do not impact bonuses, raises, or performance-based incentives.
- However, they may influence income-based applications, such as mortgage approvals or financial aid.
It’s important to view gross-ups as a relocation-specific benefit rather than a continuing compensation component.
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How can I determine if my gross-up amount is correct?
To verify the accuracy of your gross-up, follow these steps:
- Review Your W-2: Ensure the total taxable relocation benefit and gross-up amounts are correctly reported.
- Understand the Employer’s Policy: Check to be sure the gross-up aligns with what is outlined in the explanation of relocation benefits.
- Use a Gross-Up Calculator: Many online tools can help employees estimate their expected gross-up amount.
- Consult with HR or Payroll: Employers can provide a breakdown of how the gross-up was calculated.
For HR professionals, using software or working with relocation specialists can streamline the calculation process and ensure compliance with tax regulations.
Gross-Up: A Critical Part of Modern Relocation Programs
Gross-ups are critical to modern relocation programs. They improve the employee experience and ensure the employee receives the full relocation benefit. They also help make relocation more attractive for employees at all levels, demonstrating a commitment to employee satisfaction.
It’s important to remember that any of these approaches will reduce the employee’s tax liability and increase his or her relocation benefit. Still, the tax burden does not go away: it shifts to the employer. Employees should be aware that because gross-up reflects the estimated tax liability, they might still have taxes due at tax time, albeit a lower amount.
At TRC Global Mobility, we help organizations design and implement relocation policies, including gross-up strategies that align with their budgets and goals. Contact us to learn how we can simplify your relocation processes and deliver exceptional value to your team.
For more insights on grossed-up taxes and relocation best practices, visit our Resource Center.
This information and the examples of employee relocation expenses are provided as general information. Consult your tax advisors for specific advice.
