The Best Way to Handle Taxes on Relocation Benefits
Offering relocation benefits to new or promoted employees is a great way to open up your talent pool. When a company is willing to help an employee move for a job, it means they can field applications from candidates from all over the country or even the world. This helps assure that they’re getting the right person in the right seat.
However, with relocation, questions may arise in regards to tax rules and regulations that impact relocation. Taxes are confusing enough with simple W-2 entries. Moving to a new state can make it seem like there are added rules to be aware of. The best solution for this is to work with a relocation management company (RMC) that has the right processes and tax specialists in place to help sort out the confusion around tax rules. Each employee may receive different relocation benefits, based on what the company is willing to offer which adds different factors to consider when looking at the tax impacts of moving.
Within a relocation policy, companies often elect to provide a Miscellaneous Expense Allowance (MEA) benefit option to their new-hired employees. For menu-driven relocation packages, MEA could be in the form of any small additional allowance. Other relocation programs leverage an MEA to help to cover unexpected relocation-related costs or relocation services that might be needed – but are not covered under the employee’s specific policy. There are many different variations of the MEA that companies can set up for employees, but how do taxes and tax gross-ups come into play?
First Off, What Is Tax Gross-Up?
In relocation terms, tax gross-up is a relocation benefit, whereby the employer adds additional financial compensation to an employee’s payroll records in order to offset state, federal, OASDI, and/or Medicare taxes. These taxes are on the majority of reimbursements on moving expenses or payments to relocation vendors on the employee’s behalf because these expenses are seen as taxable income in the eyes of the government.
It is important to remember that tax gross-up is a talent mobility benefit provided in an employee’s relocation package, and there are multiple ways to calculate it. The hiring company can add relocation benefits as needed to up their offer and give more of an appeal to the relocation policy for the employee. It should be noted that payroll withholding is a requirement so companies need to remit payroll for taxable relocation expenses. The calculated amount of tax gross-up is used to cover a majority of the allotted payroll taxes.
Should Miscellaneous Allowances Get Gross-Up?
There are two common approaches used depending upon the relocation package offered. The first, expressing the amount in gross dollars and withholding taxes. The second, expressing the amount in net dollars and providing gross-up. In most cases, many RMCs would recommend working through the second approach.
Setting an MEA in a relocation policy using the net amount approach with an RMC can help assure there will be as few issues as possible during the relocation process. This allows the company to control costs by determining an appropriate MEA amount when factoring in gross-up. The net approach helps simplify the employee’s moving experience by providing them the actual amount received in their account so they know what is available to help relocate themselves and their families. Providing the MEA as a gross amount with taxes being withheld will result in the employee receiving a lower amount than what is listed in their relocation policy.
A Walk Through of How It Works
Consider the following “gross‐to‐net” example utilizing a Federal Supplemental tax rate of 22% State tax rate of 5% and the full FICA rate of 7.65% (Total withholding 34.65%):
Let’s say the hiring company’s relocation policy offers a gross MEA of $5,000. At first, the employee might think they can use the entirety of that on relocation costs. However, they must remember that the gross MEA of $5,000 is going to have taxes withheld.
In other words, the $5,000 gross MEA you might provide to a relocating employee won’t actually give them $5,000 worth of assistance once the above taxes are considered. The actual dollar amount the transferee will receive to spend is $3,267.50 after taxes.
To make it easier for the new-hire employee, if the MEA is listed as a net amount of $3,267.50 they will know exactly how much they have to spend. After factoring in the gross-up using the above tax rates the cost to the company is still $5,000. By changing the approach of listing the net MEA amount vs. the gross MEA amount the employee knows their budget while the company stays within spending targets.
Another important factor to consider is that the taxes employees are subject to vary depending on the state they are moving to. If providing the MEA as a gross amount, someone relocating to California may receive a lower amount than someone moving to Texas because the employee moving to California is subject to higher taxes. Providing the MEA as a net amount in the relocation policy ensures all relocators receive the same dollar amount in their account. This can be a great hiring incentive when trying to fill a seat.
GMS Can Help with Tax Gross-Up on Relocation Benefits
Global Mobility Solutions (GMS) is a full-service relocation management company that offers assistance with any talent mobility needs. Our certified team specializes in tax gross-ups and other financial services related to the relocation process. If the tax implications of your program are confusing or you need assistance in setting up the appropriate Miscellaneous Expense Allowances within your policies, let us know! We will listen to your concerns, answer your questions, and help you review your current policies to ensure they are competitive and in alignment with industry best practices. Reach out to us today to start getting all of your questions answered.
Our cloud-based MyRelocation® relocation technology is designed to help you streamline your company’s relocation management. Schedule a demo with a Mobility Pro for a no-pressure look at how our technology can help you.