How to Handle Tax Gross-Up Methods When Relocating
The relocation process can be hard to understand. Relocation policies and rules may seem like insurance terms that don’t always make sense to those who are utilizing the policies. Tax gross-up is one of the more common aspects of a solid relocation policy offered by companies to employees.
Tax gross-up (when it comes to relocation terms) refers to money that an employer can add to an employee’s payroll records to help offset federal ,state, OASDI or Medicare taxes. These taxes come into play as the majority of moving expense reimbursements, or payments to service providers on the employee’s behalf, are seen as taxable income to the employee in the eyes of the government.
In simplest terms, tax gross-up is a benefit included in an employee’s relocation package, and there is no right or wrong way to calculate it. Employers can add as much as needed to make the relocation policy appealing for the employee to relocate. However, payroll withholding is a requirement and companies should remit payroll taxes on taxable relocation expenses. The calculated amount of tax gross-up is used to pay a solid portion of the required payroll taxes on that company’s payroll.
How Should Relocation Tax Gross-Up Methods Be Applied on Policies?
Global Mobility Solutions advises our clients to keep gross-up simple, allowing employees to understand the method used and verify the amount. Also, GMS cautions companies from telling transferees that they can completely avoid any tax liability resulting from their move. Instead, companies should refer to tax gross-up as a “tax assistance” program. This way relocating employees do not get the impression that they will be “made whole” and avoid paying taxes altogether.
The Different Methods of How to Calculate Tax Gross-Up
There are a few different tax gross-up methods that companies can utilize when it comes to helping employees. Here are some of the more common methods used for relocation policies:
Inverse Supplemental: Tax on Tax
This is the most common method to calculate tax gross-up. This method uses the current Federal and State supplemental rates for calculation. This method is the easiest to administer and explain to relocating employees.
Typical methodology includes:
- Federal Rate: Supplemental Rate (currently 22%)
- State Rate: Supplemental rate of applicable payroll state
- OASDI: 6.2% up to the applicable annual cap
- Medicare: 1.45% + Surtax when applicable
Total to be added – 34.65% assuming a 5% State. But remember that this is also taxed so it is a complex situation that GMS can help with.
Marginal Rate: Tax on Tax
This calculates the employee’s estimated taxable income before receiving the relocation expense reimbursement and then compares the estimated taxable income to the IRS Tax Tables. The tax table rate is then used to determine the tax assistance amount. The tax rate will not change for the expense and therefore is not blended.
While this method provides for additional tax protection by considering the employee’s actual income level, it will typically add to the gross-up cost for the company.
Typical methodology includes:
- Federal Rate: Based on the higher annualized actual salary. Includes company source income only
- State Rate: Supplemental rate of applicable payroll state
- OASDI: 6.2% up to the applicable annual cap
- Medicare: 1.45% + Surtax when applicable
Flat Rate
This method determines a fixed percentage to be used in the tax-assistance calculation. This option does not take deductions, exemptions, or child credits into account.
Client Directed
Because gross up is a policy decision, there are other methods available. If the methods above do not align with your objectives, we can work with you to create a custom gross-up policy that satisfies both your needs and those of your relocating workforce.
Questions Companies Should Ask When Selecting a Gross-Up Methodology
- Why are we asking employees to relocate? Are we recruiting or downsizing?
- Downsizing may be saving jobs by offering employees an opportunity to relocate and remain employed with the company. Thus, a company may not need to be as generous.
- Recruiting may require a company to provide a more generous gross-up benefit.
- What is the typical income of the relocating employee population?
- What is the company gross-up philosophy?
- Did the company request the employee to relocate or is relocation a mutually beneficial partnership?
GMS Can Help with your Tax Gross-Up Policies
At GMS, our financial services offer employees access to tools and technologies including gross-up calculators that our competitors don’t offer. On top of that, our financial team is qualified to help you implement a tax gross-up methodology that works best for your needs. Our team is always willing to field questions or concerns relating to our service offerings, including how to effectively utilize tax assistance policies for relocation programs. Reach out to GMS for any of your relocation-related tax needs.
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Sam Hoey | CRP, GMS
Senior Vice President, Global Account Management Sam joined Global Mobility Solutions in 1996 and has a unique perspective with her 25 years of industry experience. Samantha offers her clients relocation expertise and a commitment to excellence in her. Her proficiency in orchestrating the BVO and GPO Programs, as well as relocation policy design and implementation, are invaluable assets to the accounts she manages. Her experience in administering Pre-Decision Relocation services to enhance the recruiting process further demonstrates her unique abilities to service her clients. Samantha’s diverse experience, leadership, and outstanding communication skills enable her to manage the relocation process for her clients with finesse and polished professionalism.
