Did you know that in the U.S., as a result of the Tax Cuts and Jobs Act of 2017, the IRS now considers relocation benefits to be taxable income?
That’s why it’s imperative for employees to understand the full scope of employee relocation tax laws and gross-up benefits. Don’t worry, we’re here to help.
Some companies will offer tax assistance only on select mobility benefits, while others might provide a lump sum as the only relocation benefit and choose not to gross up the amount to cover the tax liability.
Whether it’s for a permanent relocation or temporary assignment, the decision to tax assist or not can dramatically change the usage of a relocation benefit.
Initiating tax discussions with your HR department early on in the relocation process can help you be prepared for the gross income reported on your annual W2.
What Changed for Relocation Taxes?
Here’s an overview of what you need to know:
Before the Tax Cuts and Jobs Act of 2017…
- For employees, relocation benefits were not considered taxable income
- Employers could deduct relocation expenses incurred when relocating their employees
As a result of the legislation effective in 2018…
- Employees are now liable for paying taxes on any benefits they receive
- Employers no longer classify relocation as tax-deductible.
Relocation Lump Sum Tax Explained
When an employer provides the employee with a lump sum payment – cash or a check to cover the cost of their relocation upfront – it is the employee’s responsibility to pay tax on the amount they receive. Why? Because it is classed as additional income on top of their salary.
For example, if a salary is $80,000 and a lump sum of $10,000 is provided, the earnings for that year are counted as $90,000. The employee would not only have to pay their income tax bill on their salary, but a percentage of tax would also have to be paid on the lump sum.
Some employers choose to provide tax assistance, aka “gross up benefits,” but if they do not, the employee’s relocation costs could increase to take into account the tax bill they have coming their way.
The Tax “Gross-Up” Method
Grossing up is when an employer will increase the amount of the relocation package to help the employee cover the cost of their income tax bill. It’s more commonly used for lump sum payments, however, it can also be applied to most forms of relocation packages.
It is common for employers to gross up or cover the taxes owed on many standard relocation benefits as a show of goodwill, to maintain the competitiveness of their relocation packages and to attract and retain talent.
On average, employers use 40% as the average gross-up rate to protect transferees from the increase in Federal taxes. State taxation is another story, however. Several states have decided to continue allowing relocating employees to exclude household goods moving and relocation-related expenses. Click here to learn more.
Next Steps to Prepare for Tax Season
Whether it’s grossing up or reimbursing expenses, everything must be tracked thoroughly. We recommend contacting your HR department for more information specifically regarding your unique relocation and company policies. There are also online resources available to assist you in your move. Visit the northAmerican Gross-up Calculator for easy tax liability estimations at the click of a button!
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