Category Archives: Taxation

Relocation Tax Gross Up 101

thWhat is tax gross up?  A tax gross up means the company has increased an employee’s pay, bonus, or any other taxable income so the employee doesn’t actually pay his/her own (estimated) tax. If they are told they are getting a million dollar bonus, the tax gross up means they actually get a check for $1 million after taxes.  As most relocation costs are considered income to the transferee and subject to tax, tax gross up has the potential to greatly increase a corporation’s relocation cost.

Tax gross up is a legal business practice. If it is not done correctly, it can result in an audit and can bring adverse affects on your transferring employee and your corporation. An incorrectly filed tax gross up could mean employees might have to file a tax extension. In some cases, they might need to file an amended tax return owing to wrong W-2 statements.  It’s advisable to hire services from a third party relocation management company that offers gross up tax assistance.

Gross-up/tax assistance on taxable relocation expenses is not required by the IRS; gross-up is a benefit that a company chooses to give to transferees who qualify. Most relocation policies offer some sort of tax assistance to transferees so their out-of-pocket tax costs due to the relocation are eliminated or reduced.  One thing to keep in mind is that the gross-up payment itself also is taxable to the employee and subject to withholding and payroll tax. Therefore, to fully tax protect the employee, the gross-up must itself be “grossed up,” and the gross-up of the gross-up must be grossed up, and so on.

There are a few different methods used to calculate the gross up (inverse method, true up and simple method) and depending on how a company calculates the gross up, an employee may still end up owing money at tax time.  Below is a comprehensive explanation of how each method applies to income.  Managements generally maintain that the tax gross-up is a valuable tool for hiring and retaining talented executives. It is generally accepted within the relocation industry that transferees should not have to absorb the stress of relocation and suffer financially as well.

Continue reading

Relocation Tax Roundup 2014

imagesBig changes are occurring in relation to the current state of global mobility solutions. Staying ahead of these changes will only help to reduce costs for corporate clients and transferees alike.

A notable change involves more employees working on temporary assignment – those employees who have agreed to take a short-term position in a new location (the IRS considers any move to a single location that is expected to be less than one year, a temporary situation). Reasonable expenses incurred due to temporary assignments are considered proper business expenses that can be deducted by the company and are not considered as taxable income to the employee. Thus, actual expenses reimbursed to an employee are not subject to federal or state withholding.

Another new trend is to reconcile state taxes, thereby ensuring complete tax coverage for the employee on the state assignment side. This methodology focuses on creating a comparison between what the temporarily transferred employee would have paid in federal, state, and local taxes in the permanent, or “live”, state to those incurred in the temporary, or “work”, location. The difference between those two comparisons is the amount due to the employee.

During a session at the 2014 Great Lakes Relocation Conference tax expert David S. Oltman, CRP, Chief Compliance Officer with Ineo Relocation Technologies, offered up some tax-saving strategies meant to not only help clients reduce costs, but, also transferring employees.

Some important questions to ask in pinpointing cost savings are:

  • Is the expense for a business purpose? Whenever possible, look for a business purpose for an expense to save tax gross-up dollars.
  • Are van line charges and final move expenses included in a lump sum allowance? Whenever possible do not include either van line or final move expenses in a lump-sum allowance. Why? Because both expenses are non taxable when receipts are provided and these costs should be separated from the lump-sum amount.
  • Will we see an increase in tax gross-up percentages? Gross-up percentages could increase to almost 90% based upon proposed tax changes in 2015. The current percentage is 60%.

Important tax points all employees should consider before accepting a job transfer are:

  • Excess FICA taxes withheld by an employer are refundable to both the transferring employee and the transferring spouse (if the spouse is also working in the new location)
  • Foreign assignees need to be aware of the amount of time required by the IRS to be considered a legal resident in order to deduct moving expenses
  • Special costs, such as pet transport or tips given to movers/packers, are considered deductible expenses

It pays, literally, to remain knowledgeable about tax ramifications, especially in the year of a job transfer. Being aware of current tax liabilities and understanding relocation trends will help to alleviate tax questions and costs on an annual basis. Going forward some new trends to watch for include:

  • An uptick in companies now offering domestic tax return preparation as a relocation benefit
  • Employers considering the utilization of a “pre-move tax consult”
  • Relocation companies may opt to counsel clients that the following relocation policy language may be advisable to add: “Gross-up audit/tax reconciliations will only consider company income with regards to determining the appropriate tax bracket. Only credits truly lost, based on the actual tax return, will be considered.”

Keep in mind that this information is not intended to serve, either directly or indirectly, as financial or tax advice and you should always consult a qualified professional tax advisor when making decisions relative to your own tax situation.

IRS Freezes Per Diem Rates for 2013

In lieu of reimbursing its employees for actual travel expenses, an employer may use the per diem rates allowed for federal government employees within the continental United States, as long as the employees substantiate the time, place, and purpose of the travel.

The per diem rate includes two parts:

1. Lodging expenses (not including any lodging tax that may be charged); and

2. Meals and incidental expense (M&IE), which cover such items as tips and gratuities for bellhops, porters, stewards, and other service providers; laundry and pressing expenses; the cost of mailing items like travel vouchers; and transportation to and from meals if adequate meals aren’t provided at the work site.

Instead of using the per diem rates for specific business destinations, an employer may rely on simplified “high-low” rates established annually for travel within the continental United States. If an employee travels to one of the handful of places designated as a high-cost area, trouble-free reimbursements are based on the special rate for high-cost areas. Otherwise, the employer uses the rate for low-cost areas.

In new Notice 2012-63, the IRS has announced the rates for the government’s 2013 fiscal year – spanning October 1, 2012, through September 30, 2013 – have been frozen at the same levels as last year.

Notice 2012-63 contains:

  • transportation industry meal and incidental expenses rates
  • The rate for the incidental expenses-only deduction
  • The rates and lists of high-costs localities for purposes of the high-low substantiation method

A complete copy of the notice can be downloaded here

Source:  KPMG