Any discussion of relocation benefits and their tax treatment has three parts: the good, the bad, and the part that needs more explanation.
The good: relocation benefits, period! They’re a powerful recruiting tool for businesses and a valuable benefit for employees who want to relocate for work.
The bad: employer-paid relocation expenses are taxable to employees—and that usually costs employers more, too. It wasn’t always the case, and may not always be, but for now, relocation benefits are considered income.
The part that needs more explanation: while there aren’t exactly loopholes, there is a valid workaround, plus some exceptions. Here’s a quick primer.
Back in the good ol’ days, before the Tax Cuts and Jobs Act of 2017, employer-paid relocation benefits were not taxable to employees. But in order to offset other elements of the law, this provision was reversed.
It doesn’t matter which benefits are covered (moving costs, transportation, etc.) or how the employer pays for them (cash disbursements, reimbursements, etc.). Benefits are treated as taxable wages and are subject to federal income tax and FICA.
Of course, the specific tax impact on each employee varies, depending on their relocation benefit, income/tax bracket, and place of residence. But one thing is universal: paid relocation expenses are included in employees’ W-2s.
The law changed things for employers, too. Before 2018, paid relocation benefits were considered a tax-deductible operating expense. Now, they’re a compensation expense. While the net impact of this change is minor, the workaround is anything but.
Employers realized that, if employees had to pay taxes on relocation benefits, fewer would relocate (or, at least, relocate happily), and that could cripple their talent management plans. So, most employers chose to compensate employees for the cost of those taxes—i.e., pay relocation tax gross-ups.
Handling relocation tax gross-ups isn’t a simple process. There are several calculation methods to choose from and lots of moving parts. For this reason, many employers outsource this function to their relocation provider’s tax team.
Relocation tax gross-ups aren’t quite a “loophole,” but a legitimate business solution to an otherwise sticky problem.