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 apply to the majority of reimbursements for moving expenses or payments to relocation vendors on the employee’s behalf, because these expenses are treated as taxable income by the government.
It is important to remember that a 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 sweeten the offer and make the relocation policy more appealing to the employee. It should be noted that payroll withholding is required, so companies must remit payroll for taxable relocation expenses. The calculated tax gross-up amount is used to cover most of the allotted payroll taxes.
Should Miscellaneous Allowances Get Gross-Up?
There are two common approaches used when structuring an MEA, and the right choice typically depends on the design of the relocation package. The first approach presents the allowance as a gross amount, with applicable taxes withheld at the time of payment. The second approach provides the allowance to the employee as a net amount, with the company applying a gross-up to cover the tax burden. In practice, most RMCs tend to recommend the net approach, as it offers greater clarity and consistency for both the employer and the relocating employee.
Setting an MEA in a relocation policy using the net amount approach with an RMC can help ensure a smoother, more predictable relocation experience with fewer administrative complications. From a cost management perspective, companies can more accurately forecast and control total spend by determining an appropriate net allowance and factoring in the gross-up upfront. At the same time, this method significantly improves the employee experience by clearly communicating the exact amount they will receive, eliminating confusion around tax deductions. Employees can plan more effectively, knowing precisely what funds are available to support their move and cover incidental expenses.
Additionally, this transparency can reduce questions and friction during the relocation process, leading to higher satisfaction and fewer unexpected financial surprises. In contrast, providing the MEA as a gross amount with taxes withheld often results in the employee receiving less than expected, which can create frustration, budgeting challenges, and a perception that the benefit falls short of its intended value.
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.
