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