What is the Meaning of Relocation Tax Gross Up?

If you don’t fully understand the term “relocation tax gross up,” you’re not alone. After all, it’s only existed for a few years. Whether you’re an employee who hasn’t experienced corporate relocation, or an employer creating a new relocation program, you wouldn’t have reason to know what it is. 

But now’s a great time to learn. Because—between the Great Resignation and the current labor shortage—people are on the move. Corporate relocations are on the rise, and that means relocation tax events are increasing, too. 

Because when it comes to corporate relocation, federal taxes are always part of the picture. No matter which side of the employment fence you’re on, here’s the least you should know about relocation tax gross ups—and what they might mean to you.

How Relocation Tax Gross Ups Came to Be a Thing

We’re not sure who coined the term “relocation tax gross ups,” but we do know where it started: with the Tax Cuts and Jobs Act of 2017, which became effective January 1, 2018.

Up until then, qualified employers could deduct the relocation expenses they paid on behalf of employees—benefits that weren’t taxable to employees. But that sweet deal was upended by the new legislation. Employers can no longer deduct relocation expenses. Worse yet, employees must treat these benefits as taxable income. 

Everyone loses, except the IRS.    

No wonder, shortly after the law went into effect, employers recognized the dilemma. If they were to continue leveraging relocation benefits as a recruiting and talent management tool, they needed to cover the cost of these taxes—i.e., “gross up” each employees’ relocation benefits so employees wouldn’t need to pay them out of pocket. That’s what it means. Here’s how it works.

The Nuts and Bolts of Relocation Taxes 

According to Ben Franklin, taxes are one of two things in life that are certain. While taxes beat the alternative, relocation taxes are taxing for sure. 

It doesn’t matter how the employer delivers benefits—whether by giving employees a lump sum, reimbursing them for submitted invoices, or paying vendors directly. They’re all equally taxable.

And it doesn’t matter what those relocation benefits cover: moving costs, travel expenses, home-related costs, short-term housing, etc. In the eyes of Uncle Sam, they’re all taxable income. There’s no loophole. Sorry—we really looked.   

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How Relocation Tax Gross ups Work for Employers

Employers aren’t required to pay relocation tax gross ups to employees, but in our experience, the vast majority do. 

The reason is simple. The whole point of offering relocation benefits to current or future employees is to entice them to upend their lives (and often their families’) to make a corporate move. 

Moving is a very big deal. It’s one of life’s top 10 stressors. Relocation benefits are designed to ease the process—to create a positive relocation experience, so the employee can start their new job with a clear head and good attitude.

Sticking employees with a big tax bill won’t accomplish that. In fact, it’s a great way to undercut all the good will created by offering relocation benefits in the first place. Unhappy employees are not productive employees. Nor are they the most likely to stick around. 

That’s why relocation tax gross ups are so important to both employees and employers.

One Key Relocation Tax Gross Up Tip for Employees

If you’re offered a job that involves a move, ask if relocation benefits are included. If not, negotiate them before you accept the offer. Make sure those benefits include a tax gross up; that’s something you can negotiate, too. 

Don’t feel awkward about it. Employers expect it. Think about it: if you end up paying for your relocation yourself, that’s thousands of dollars out of your paycheck. If benefits are provided but a tax gross up is not, that’s thousands, too. 

Three Key Relocation Tax Gross Up Tips for Employers  

Paying relocation tax gross ups is an expense and a headache most employers could do without. That said:

  1. Do it. Pay them. Tax gross ups are a critical feature of a competitive relocation package.
  2. Find ways to offset the cost without weakening your relocation benefits. For example, use a relocation provider that’s negotiated significant vendor discounts and doesn’t accept vendor commissions. 
  3. Offload the administration of your program to an expert. Like everything tax-related, relocation tax gross ups are complex and risky—and you’ve got to get it right.

As far as we know, relocation tax gross ups are here to stay. That’s why it’s not only important to know what the term means—but what it means to you.

Human Resources Today