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Let’s break this down again. Here’s how things would look for Lucy with and without a tax gross up:
Example 1: No Tax Gross Up for Lucy
Although Lucy received a $5,000 relocation bonus, $2,000 in income taxes are taken out before she gets the cash. In addition, based on the $11,000 moving costs her employer paid directly, she owes an extra $3,500 in income tax. Her W-2 will reflect $96,000 in earnings—and her relocation will cost her an extra $5,500 in income taxes.
Example 2: Lucy Gets a Tax Gross Up
In order to cover the taxes for Lucy’s $5,000 relocation bonus and $11,000 professional moving company, Lucy’s employer pays Lucy an additional $7,000 in earnings, paid directly to the IRS on Lucy’s behalf. The $7,000 includes the extra $5,500 tax burden, plus $1,500 for taxes on those dollars. Lucy’s W-2 will reflect $103,000 in earnings ($80,000 + $5,000 + $11,000 + $7,000), but her relocation won’t cost her a penny more in taxes.
Relocation Tax Recommendations for Employers
For employers who depend on their relocation program to acquire and retain top talent, a relocation tax gross up is the number one way to avoid a negative employee experience.
To report relocation benefits properly to the IRS, employers need to track relocation expenses meticulously. The best way to do so is to rely on a third-party relocation management company (or one of their partners) who specializes in this. Managing reimbursements, cash payments and/or direct payments to vendors gets tricky. If a payroll department fails to code these as taxable benefits, employers risk IRS fines and penalties.
What about the additional expense associated with relocation tax gross ups?
These days, smart employers are restructuring their relocation programs to be more cost-effective, using a number of different relocation strategies. In brief, these may include:
- Providing managed lump sum plans, which allow employees to use the funds at their discretion, so dollars go further.
- Offering tiered relocation packages, so employers can scale benefits to different level employees.
- Creating “Discard and Donate” incentives, which cut moving costs by incentivizing employees to donate their household goods to charity rather than move them.