Employers often offer relocation reimbursement expenses and bonuses as part of job relocation packages. While both are welcome benefits, it is important to understand the difference between relocation reimbursement and bonuses.
Bonuses and employer paid moving expenses, such as house hunting relocation reimbursements, qualify as additions to employees’ taxable income and require employers to pay standard payroll taxes such as Federal, State, and FICA.
Relocation Lump Sum Tax
In lump-sum bonus programs, employees are responsible for the relocation bonus tax. If employers choose not to provide tax assistance (gross-up), a percentage of the employee’s total bonus will be taken out to cover the relocation bonus tax owed to the IRS. For example, if an employee receives a $3,000 relocation bonus and the IRS collective tax rate (Federal, State, and FICA) is 30%, $900 will be taken out of the bonus to cover the tax and the employee will only receive $2,100.
Difference Between Relocation Reimbursement & Bonuses
Employee bonuses are typically paid for one or both of the following reasons:
- The employer decides to offer a bonus as an incentive for the employee to agree to relocate.
- The employer recognizes that the cost of living is higher in the new location versus the employee’s current location.
Bonuses as incentives or payments to defray increased cost of living must not be confused with employer paid moving expenses. Bonuses of this kind are treated as additional taxable income. Salary increases are usually easier to understand as taxable income, but employees may find it more difficult to accept an additional tax burden resulting from a moving bonus.
Because of this, many employers choose to provide tax assistance (tax gross-up) to further incentivize relocation. However, this can add 45 to 70% to the total spent by the company.
Balancing relocation costs and employee satisfaction requires careful consideration. Employers should adopt relocation reimbursement policies that take advantage of available tax benefits, while offering reasonable, equitable, and fair relocation programs for their valued employees.
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