If it has the potential for financial ramifications, you can bet that it is going to be a top-of-mind concern for your employees. So, when it comes to relocation, understanding tax gross-up and how relocation bonuses can impact an employee’s bottom line are key discussions that need to happen early on in the process.
The last thing that you want is for your employees to have any surprises on their tax returns, or to sour on the idea of relocation because they think it could cost them a significant amount of money. Instead, you want to accentuate the benefits afforded to them as part of your relocation policies and benefits, while mitigating anything that could be seen as financially negative.
So, let’s start by defining tax gross-up and what it means for you and your employees.
What is Tax Gross-up?
Tax gross-up is a company-provided tax allowance that is added to an employee’s reportable wages. It is meant to offset in part or in whole the income tax burden (federal and state) of any specific payments made to the employee for certain taxable, nondeductible reimbursements or allowances.
In other words, the gross-up is an increase on the gross amount of the employee’s wages, which is intended to cover or help cover the employee’s tax cost. The idea is that it keeps the employee whole, so that they are not saddled with a higher tax burden as a result of a relocation.
Thus, this is an important benefit that makes relocation more attractive to your employees from a financial standpoint.
Is the Gross-up Taxable?
A common question that relocating employees ask is whether the gross-up payment will also become taxable. The short answer is yes. So, employers then have to decide whether or not they are going to gross-up the gross-up. While this is up to the organization, historical best practices for grossing up the gross-up is that it is generally a benefit that is provided for executive level employees.
But, as times change and business needs evolve, so too have relocation policies and benefits. So, if you have outgrown your current relocation policies, or they no longer fit the needs of your organization and your employees, don’t hesitate to make appropriate changes, which might also include your approach to tax gross-up.
This is especially important given the competitive business environment that most companies find themselves in today. In order to compete for the best talent, and retain key talent, relocation policies and benefits need to reflect that which is prevalent in their industry.
Who is Eligible for Gross-up?
Since companies typically offer more than one set of relocation policies and programs (which can vary considerably), not every employee will be eligible to receive the same benefits. Likewise, the needs of each employee will have its variances, and will be treated accordingly.
For example, a recent college graduate who is a newly hired employee will not have the same benefits as a seasoned executive employee who has been with the company for several years. And, an employee who is a homeowner might be eligible for home sale benefits, whereas an employee who currently rents an apartment would not.
But, as you consider the value of your mobile workforce, always err on the side of staying competitive within the marketplace and making relocation an attractive part of career development for your employees. It is all part of the overall employee experience, which is vital to employee retention.
What is a Relocation Bonus?
Relocation bonuses have also become somewhat commonplace as an employee benefit. Relocation bonuses are generally paid as a one-time lump sum payment to the employee as an incentive for relocating, and/or to compensate for a higher cost of living in the new location. Either way, that relocation bonus is also considered additional taxable income for that employee.
As with all other relocation policies and benefits, the payment of relocation bonuses is at the discretion of the employer, and is not necessarily a guarantee for all employees. Likewise, the amount of that bonus can be calculated based on a number of factors that are specific to the company and/or the employee or candidate in question.
For more information on taxable relocation expenses, please click here: Taxable Relocation Expenses.
Should You Implement Changes to Your Relocation Policies and Benefits?
At the end of the day, you want to make relocation attractive and easier for your employees. To achieve this, you have to ensure that your relocation policies and benefits are in keeping with industry best practices, and even a step ahead of your leading competition. That might seem like a difficult endeavor given the backdrop of an ever-changing global business landscape. But, with the right partners in place, you will be able to achieve both your talent management and talent mobility goals.
At VERSA, our clients expect us to be their trusted partner, and to provide them with expert guidance that best enables them to achieve those goals. One of the ways that we do that is by assisting them in staying competitive through new and revised policy development and implementation.
How competitive are your current relocation policies and programs? Please contact VERSA anytime and we will be happy to discuss them with you!