What Is a Relocation Tax Gross up?

When it comes to relocation benefits, people ask us many questions on a wide range of topics. But one of the questions we hear most often—year in and year out—is: 

What the heck is a relocation tax gross up?

We also get this variant (inevitably asked by relocating employees, sometimes in rather heated tones):

Wait! You mean I’ll need to pay taxes on this?    

Don’t kill the messenger, but unfortunately, relocation benefits are taxable to the employees who receive them. The good news is, many employers elect to cover the cost of those taxes for their employees. These funds are known as “relocation tax gross ups”—as in, the employer “grosses up” the employees’ relocation benefits to include the resulting taxes.  

Needless to say, it’s not the most popular piece of federal tax code for affected employees and their employers. 

“No matter how much you try to warn people that they’re going to get taxed, without fail it freaks them out,” says Rebecca Kapsalis, Director of Talent Acquisition at The University of Vermont Health Network. “Fortunately, UrbanBound has given us a tool to get in front of them and get the message across.”  

Allow us to explain. 

How Relocation Taxes Impact Employees

For employees, relocation benefits are considered taxable income no matter what the benefits cover or how they’re paid. That includes:

  • Cash disbursements
  • Reimbursements 
  • Payments made directly to moving companies, hotels, etc.  

Yes, even if the employee doesn’t see the cash directly, they still need to pay tax on those benefits.

For relocating employees, this results in smaller relocation benefits, higher out-of-pocket costs and, often, a less-wonderful relocation experience. For this reason, many employers choose to “gross up” their relocation benefits and essentially cover the cost of these taxes for employees.   

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How Relocation Tax Gross ups Impact Employers 

Many, but not all, employers elect to pay the gross up. While this makes employees happy, it creates several challenges for employers, including:

  • Taxes are complicated. Calculating tax gross ups for individual employees is not a slam dunk—it requires knowledge and expertise. 
  • Whenever taxes are involved, employers need to keep meticulous records, and relocations tend to require quite a bit of documentation to begin with. It can be messy and time consuming.  
  • Covering employees’ relocation taxes drives up the cost of employers’ relocation programs.  

Part of what makes this difficult for employers is that they’ve only been dealing with tax gross ups for several years. Prior to 2018, most employer-paid relocation expenses were considered a tax-deductible business expense for employers. Furthermore, relocation benefits were not taxable to employees. 

But once the Tax Cuts and Jobs Act of 2017 went into effect on January 1, 2018, all that changed. Now, relocation expenses are no longer tax-deductible for employers and benefits are taxable for employees—a double whammy.     

While this might potentially inhibit employers from offering relocation benefits, in today’s highly-competitive labor markets, a strong relocation program is essential to meeting talent acquisition goals. 

What’s the solution? Well, smart employers are finding creative ways to minimize their additional administrative responsibilities and reduce their relocation costs, without compromising the employee experience. 

Removing the “Gross” from Employers’ Tax Gross ups

Perhaps the easiest way for employers to reduce their administrative burden is to offload it to an expert—a relocation management company that will maintain all the necessary records, calculate tax gross ups accurately, and generally make life easier for everybody. 

In addition, employers can easily reduce their relocation program costs by:

      •        · Shifting from flat lump sum-based policies to managed budget policies—which keep all unspent funds in the employer’s account.  
  •        · Choosing a relocation company that has negotiated vendor discounts with pre-approved movers/shippers and offers a range of solutions geared to                 different-sized moves. 
  •        · Picking a relocation company that is transparent about vendor relationships and doesn’t strive to profit off of referral fees can be a challenge in the                 industry. Unfortunately, it is common and something you don’t hear much about. You won’t see that at UrbanBound! 

How do we know all this stuff? Because we’ve made it our mission to be the kind of relocation company that eases the workload for employers and employees while significantly cutting costs all around. We can help you take the gross out of gross ups—can we show you how?      

Human Resources Today