Relocation expenses do not fall under income tax and are not deductible. If an employer contributes to the employee’s relocation costs, the individual is exempted from paying tax, and this is termed as a relocation allowance. To individuals entering the world of corporate relocation, the term’ relocation tax gross-ups can create chaos. A constant change in the business requirements may lead employees to relocate to another office space in a different city or state. In these cases, employees are provided with a bonus to offset any such relocation costs that the employees might incur. This guide will interest individuals to gain a comprehensive understanding of how taxes on relocation bonus work for both the business and employee.
Reasons for Changes in Relocation Taxes
With the inception of the Tax Cuts and Jobs Act, 2017, The benefits or bonuses related to relocation were not considered taxable income for the employees. However, employers could deduct the relocation expenses incurred when relocating the employees.
As a result of the new legislation, taxes on relocation bonuses are now necessary for employees, and the employers are no longer to classify the relocation as tax-deductible. However, there are savvier working paths to ensure an employer is tax compliant and an employee is swindled, thus creating both a smooth and efficient relocation process.
According to the new legislation, a few relocation expense exemptions and deductions to be remembered that can be applied by the relocating employee- transportation and household goods storage and final move expenses for 30 days interval were eliminated.
How does the Relocation Taxes Process Work?
Income taxes depend on numerous factors determining the tax bracket an employee is looped into, including filing status, monthly salary, location-both city and state, and a few other factors.
Relocation bonus or benefit tax calculations are rarely considered outside the income range or investments. However, before delving into the gross-up relocation bonus taxes, an individual must hold elementary knowledge on how relocation impacts an employee’s tax situation.
Difference between Relocation Package and Reimbursement
A relocation package is an option offered by a business to an employee to begin the relocation process. While some employers provide a relocation signing bonus and pay, there are two primary reasons. Employee relocation bonuses are typically paid for two reasons-
- When an employer decides to offer a lump bonus as an incentive for any employee willing to relocate.
- An employer recognizes that living costs are higher in the new location than the employee’s current area.
Based on the bonus package, the money is reimbursed to the employee after the relocation job role is accepted and the relocation occurs at the early stage.
In reimbursement, an employee is to cover the relocation, and the business reimburses the amount once the relocation is completed. Receipts are provided upon the relocation bonus, and the company can still outline what the relocation includes.
What is Relocation Lump Sum Tax?
A lump-sum payment is termed when an employer provides the employee with a check or cash to finance the cost of relocation upfront. The employee’s responsibility is to pay taxes on the amount credited as an additional income on top of the pay package.
For instance, if a relocated employee has an $80,000 pay package and is offered a lump sum of $10,000, the total earnings for that financial year account for like $90,000. The employee is benefited to not only pay the income tax based on the salary, but a percentage of tax would also have to be reimbursed on the lump sum.
Tax Brackets and Federal Tax Income depend on multiple factors like-
- Filing Status
- Location- city or state
- Salary Package
Additional to cash payments, bonuses, and incentives, other factors like the cost of the flights, pay-outs, and moving fees made by a company for accommodation, whether temporary or permanent, are all taxable.
A Brief on Employer-Paid Moving Expenses
Standard relocation expenses reimbursed by the employer relating to the transporting of the employee’s household goods and personal possessions inclusive of the family’s final mover includes-
- In-transit lodging or consignment
- Direct moving company costs for transportation of personal interests and household merchandise
- Insurance on the individual and household goods and items
- Unpacking and packing of household goods and personal property
- Transportation costs from the employee’s primary origin residence to the newly relocated site
- Storage costs for up to the first 30 days after the relocation
Relocation Tax Recommendations for Employers
A relocation tax gross-up is a section implemented for employers who depend on the relocation program to acquire and retain the top talent. The relocation tax gross-up also avoids employee experience.
To report relocation benefits properly to the Internal Revenue Service or IRS, employers need to track the relocation expenses meticulously. This can be achieved by relying on third-party relocation management specializing in the area. Cash payments, direct payments, or Managing reimbursements to employees can become problematic. If a payroll department fails to code these as taxable benefits, employers are at risk of the IRS fines and penalties.
What about the additional expense incurred or associated with Taxes on Relocation Bonus?
Many employers are constantly restructuring the location programs to additional benefits like cost-effectiveness, using several relocation strategies. In brief, the other expenses incurred includes-
- Offering tiered relocation packages to employers to scale the services to different level employees.
- Providing managed lump sum plans to allow employees to utilize the funds at the employee’s discretion to boost the income.
- Creation of ‘discard and donate’ incentives help to cut the moving costs by incentivizing employees to donate the household goods to charity rather than moving up to the new relocation site.
Conclusion
Whether it’s grossing up or reimbursing expenses, every finance-related summary must be tracked thoroughly. Management of the payments back to the employee and tax payments for services directly is a tedious process. Therefore, allocation to a third-party provider is an option to consider.
Many employers relocating an employee, whether new or existing, is the best way to acquire and retain the best people for the job. Therefore, taxes on relocation bonus should be considered to avoid a negative moving process, cost-effectiveness, or other factors.
