Are Relocation Expenses Taxable?

Understanding Relocation Expenses Taxation

If your company reimburses you or pays for relocation-related costs on your behalf, are these expenses taxable? This is a common question for those relocating for work.

Before the enactment of the Tax Cuts and Jobs Act of 2017, the IRS allowed taxpayers to deduct certain moving expenses and exclude employer reimbursements for qualified moving expenses. However, these deductions and exclusions are no longer permitted except for active-duty armed forces personnel. This legislation took effect for the 2017 tax year and is scheduled to sunset in 2026.

Relocation expenses paid by an employer (except for Buyer Value Option (BVO) and Guaranteed Buyout Offer (GBO) structured home sale programs) are considered taxable income to the employee by the IRS and state authorities, as well as by local governments that levy an income tax. This includes household goods transportation, temporary living expenses, miscellaneous allowances, lump sum payments, and benefits paid to or on behalf of relocating employees.

Relocation Policy Support vs. Relocation Reimbursement

Relocation policy support refers to a comprehensive set of benefits an employer provides to assist an employee with the process and expenses of relocating. This assistance can include various services and financial provisions aimed at easing the employee’s transition.

In some cases, particularly for new hires, employers may offer a combination of a signing bonus and a relocation policy as part of their offer negotiation process. Once the relocation services have been authorized, the employer typically engages a Relocation Management Company (RMC) like InterLink Relocation Resources to administer the relocation. After the employee has accepted the offer and, if applicable, signed the company’s repayment agreement, the company will authorize the RMC to begin services and disburse funds.

On the other hand, a relocation reimbursement program involves the employee covering the relocation expenses upfront and being reimbursed by the employer afterward. The employee typically submits receipts for eligible expenses incurred during the relocation process. Despite the reimbursement method, the business can still specify which relocation expenses are covered under the program. This program type is often called a Managed Cap Relocation Policy.

Are Employers Required to Gross Up Relocation Expenses?

Gross-up payments can be one of the employer’s most significant relocation expenses. While it is considered typical and best practice, employers are not obliged to gross up relocation benefits. Some employers compromise and gross up only some relocation benefits.

Employers choosing not to gross up should ensure employees know taxes will be withheld from the expected payments. If the employer makes payments on the employee’s behalf, such as paying a moving company directly, the employee might have additional taxes due at tax time.

What is Tax Gross Up?

Gross-up is an additional payment from the employer to cover the extra taxes due on the relocation benefits. This process ensures that the employee receives the full, expected relocation benefit.

2024 Supplemental Rates

As some companies gross up relocation benefits at supplemental rates for federal and state levels, most companies also withhold supplemental tax rates for non-grossed items. At InterLink Relocation, we stay on top of supplemental rates and explain the potential tax implications within your policy. Counseling relocating employees about what to expect regarding taxes associated with their relocation benefits can be very helpful.

Federal supplemental rates remain unchanged, holding steady at 22 percent withholding for supplemental wages under $1 million and 37 percent withholding for non-salary wages over $1 million.

Gross Up Methodologies

Companies that choose to gross up must determine the methodology they wish to utilize. Grossing up relocation benefits can result in an enticing policy that helps achieve retention and recruitment goals.

Everything must be tracked and reported to payroll on time, whether grossing up or reimbursing expenses. Managing the payments to the employee and paying for the services directly can become a long, detailed process for companies to do internally.

Conclusion

Allocating this work to an RMC like InterLink Relocation, which has the expertise and resources to administer your relocation program, is an option to consider. Contact us today to start the conversation and explore how InterLink can support your company’s relocation and global mobility programs.