Relocation and Taxes

Why Taxes Should Be a Factor in Your Relocation Strategy

Relocation, no matter what kind of strategy you have, is expensive. Depending on the employee and their living situation, costs can add up to $100,000. While the value of relocating top talent and creating a great employee experience is crucial to your business, it’s clear that relocation is no small investment. So when you look at creating your company’s relocation program, take a look at the tax implications. You could save — or lose — more than you think.

The relocation strategy you choose can make a big difference tax-wise. Lump-sum relocation payments incur income tax. On the other hand, some relocation expenses are tax-deductible, such as moving household goods. This article by The Balance provides an in-depth guide to paying moving expenses and managing relocation taxes — including information on deductions, withholdings, and reporting. We’ll explore two of these implications here.

The Lump-sum Tax Bite

Since a relocation allowance is treated like a bonus, it’s considered taxable income to the employee. You, the employer, must withhold state and federal taxes and pay Social Security taxes — decreasing the amount of income for the employee to use for their moving expenses. To counteract this, you can “gross up” the lump sum to cover the tax liability, which can add up to 50 percent to your cost.

For example, you want to give your employee a $20,000 lump sum to relocate. After taxes, the employee will be left with only about $13,000. Since the employee still needs $20,000 to execute their relocation successfully, you have to add another $11,000, resulting in $31,000 as the full cost of the relocation allowance.

There must be a better way to cost-effectively manage a relocation.

The Benefits of Paying for Expenses Directly

With lump-sum relocation, not only are you potentially paying more in taxes than necessary, but you could be missing out on important tax benefits. Under current tax law, certain expenses are excludable from taxable income, such as moving household goods and expenses associated with travel and lodging during the move.

As the employer, if you pay these expenses directly to the provider, rather than cutting a check, they won’t be reported as income to the employee. This can help you save 50 to 75 percent of the gross-up amount you’d pay to cover the income tax of a lump-sum payment. In the example above, that would result in a total payment of $22,750 rather than $31,000.

The tax implications of relocation can have a huge impact on the overall affordability and success of your mobility program.