Relocation Gross-Up for Taxes

💼 Relocation Gross-Up for Taxes

Complete Guide

Understanding relocation and relocation gross-ups can be confusing. After reading this guide, you’ll have a much clearer understanding of relocation taxability, how gross-ups work, and the methods available to calculate them accurately.

🧾 How Relocation Taxes Work

Tax rates depend on multiple factors such as:

💼 Salary

📍 Location

📄 Filing status

To understand how to gross up relocation taxes, you must first understand how your employee’s relocation tax situation is impacted:
🔗 https://www.corporateamerica.us/relocation-tax/

📌 Example 1: Bill’s Relocation Reimbursement

Bob earns $90,000 annually. This year, his employer reimbursed:

🚛 $3,000 for a moving truck

✈️ $700 for a flight

His W-2 now reflects $93,700. Bob cannot deduct these costs as a moving tax deduction and must pay taxes on the added $3,700.

📌 Example 2: Alice’s Relocation Package

Mary earns $90,000 and receives:

💰 $8,000 relocation bonus

🏠 $10,000 paid directly to movers

Her W-2 will now show $108,000, meaning she owes taxes on relocation benefits totaling $18,000.

These examples show how relocation costs can unexpectedly increase tax burdens. Employers using relocation to attract or retain talent should consider gross-up payments to alleviate that pressure.

💡 What Is a Relocation Gross-Up?

A relocation gross-up occurs when an employer increases the employee’s relocation benefit to cover the resulting tax liability. This ensures the employee receives the full intended value.

For example, if relocation costs are $10,000 and subject to income tax, the employer may pay $12,500 to account for the estimated $2,500 in taxes—so the employee receives $10,000 net.

🔄 How Does a Tax Gross-Up Work?

Most relocation-related expenses are taxable income and must be reported on the employee’s W-2. Employers must comply with IRS regulations on supplemental withholding and treat these payments just like bonuses or commissions.

🕒 When to Use a Relocation Gross-Up

Without gross-up assistance, a relocation bonus may unexpectedly raise an employee’s tax liability.

To avoid dissatisfaction, employers often provide a gross-up, which can increase the original cost by 55% or more depending on income and state/local taxes.

A gross-up is especially useful when covering:

Bonuses

Moving reimbursements

Lump-sum relocation packages

Other relocation package components

Use our relocation cost calculator to estimate your company’s relocation spend with gross-up options included.

📊 Methods for Calculating Relocation Gross-Up

There are three primary methods employers use to calculate relocation gross-ups:

1️⃣ The Supplemental Method

This method calculates gross-up on the gross-up since both the relocation benefit and the gross-up itself are taxable.

Example:

Taxable amount: $7,000

Federal tax: $546.89

State tax: $90.43

Medicare: $29.84

Social Security (OASDI): $295.15

Total gross-up: $962.31

Total wages reported: $7,962.31

👉 This method is accurate but requires detailed salary and tax data for precision.

2️⃣ The Flat Method

A flat tax percentage (e.g., 30%) is applied to the relocation amount.

Example:

Taxable cost: $2,000

Gross-up: $600 (30%)

Total payout: $2,600

⚠️ The gross-up itself is taxable and may not fully cover liability. Learn more about taxable income.

3️⃣ The Marginal Method

Used by CPAs and full-service relocation companies, this method considers:

Filing status

Income bracket

IRS Form 1040 rates

It calculates the true “tax on tax” for the most accurate gross-up. Non-wage income like investments or spousal earnings are excluded.

✅ This is the most accurate and widely used method.

❓ Frequently Asked Questions

What relocation expenses are taxable?

Almost all employer-paid relocation expenses are taxable income, unless directly excluded under a specific tax exemption.

How do I calculate a relocation gross-up?

Divide the taxable expense by (1 - total tax rate).
Example: $10,000 ÷ (1 - 0.25) = $13,333.33

How does a tax gross-up work?

A gross-up increases the payment so that the employee receives the full intended benefit after taxes are withheld.

✅ Final Thoughts

A well-executed gross-up strategy shows your employees that you care about their financial stability during one of the most stressful transitions in their careers.

Whether you’re reimbursing a moving truck or providing a full signing bonus, gross-ups ensure your relocation benefits aren’t unintentionally penalizing the people you want to retain.

Ready to build a modern, compliant relocation strategy?

📞 Contact CARS Relocation or schedule a call today to get started.

🔗Resource Links:

https://corporateamerica.us/services/corporate-relocation-service

https://www.corporateamerica.us/buyer-value-option-bvo/

https://www.corporateamerica.us/employment-relocation-council/