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Relocation Bonus Taxes: Are Relocation Expenses Taxable?

Monday, March 27, 2023
A medium shot of a couple trying to work out their relocation bonus taxes

Relocation expenses are when a company covers some of, if not all of the costs of moving an employee to their new working location on behalf of the company. But, the question arises: are these relocation expenses taxable income for the employee?

Relocation Expenses Are Taxable

To put it in simple terms relocation expenses are considered taxable income for employees. This is according to the IRS, and even local state authorities. This covers temporary housing, goods transportation, miscellaneous items, etc. The Tax Cuts and Jobs Act of 2017 is the cause of this. Furthermore, it is scheduled to be reviewed in 2026.  

Pre-2017, relocation benefits were not considered taxable income for the employees who move due to the company they work for. Plus, employers were allowed to deduct expenses when relocating their employees. However, since this act is in effect, employees now must pay tax on the relocation benefits they receive. What is more, is that employers no longer classify relocation expenses as taxable deductions.

What is the Impact of Taxable Relocation Bonuses?

 A woman sitting at a table looking at her relocation expenses tax forms she needs to fill in and pay

How much tax the employee pays on their relocation is factored in by looking at their specific tax bracket as well as their new place of residence. However, the employer can pay this either directly or on behalf of their employees. But, the tax must be added to their employee’s W-2 for the year.  

To put this into more layman's terms: an employee (Mark) who works for one business and has an annual salary of $75 000 is required to relocate to a new office space in a new city on behalf of the current business they are working for. The salary is the same.  

However, Mark will get a bonus of $5000 as well as a lump sum of $10 000 to help cover the moving costs. So $15 000. Therefore, the employee’s W-2 income for that year will be $75 000 plus $5000 plus $10 000 which equals $90 000. Mark will own taxes on the bonus and the lump sum relocation allowance as if they are the employee’s ordinary income for the year.

It can be said that the employee’s relocation benefits will not be as high as they wanted since they will go towards their taxes. However, outside of presenting employees with relocation bonuses, and salary increases to motivate them to relocate, employers can also “gross-up” the relocation benefits as a way to cover the additional tax due.

Tax Gross-Up

 A woman leaning on a table, smiling and pointing to different sized model house made of cardboard

As the name can suggest, it is when an employer adds additional payment to cover the costs of the relocation taxes. It is used so that the employee can get their full relocation benefits. Therefore, if the business that is relocating Mark, for example, uses gross-up then this can result in the following: 

  • The business pays another $5500 to the IRS on behalf of their employee, Mark
  • This $5500 consists of, let’s say, $4500 tax due on the relocation benefits
  • Plus, the “tax on tax” due to the gross-up
  • Therefore, Mark will get their full relocation benefits (bonus and lump sum) of $15 000
  • And, the taxes are already covered by their employer

Not Using Tax Gross-Up

While a gross-up can help out the employee a lot, it is not obligatory for employers to do this. They may decide to use it for some relocation benefits, but not all. It depends on their budget, mostly. However, if the employer decides not to use a gross-up, then their employee must know this information. Furthermore, if the business/employer pays a moving company directly on behalf of their employee, then the employee can expect additional taxes due at tax time.  

In Mark’s case, if their business does not use gross-up then they will only get $10 500 after their taxes are deducted. Before the employer thinks about gross-up or relocation expenses as a whole, they have to speak to their tax advisors to get all the clear information they need to make an informed decision. Furthermore, the professional tax advisor will help them calculate the tax on their employee’s relocation bonus.

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Difference Between a Relocation Package and Relocation Reimbursement

A couple sitting on a sofa while looking at an open notebook with relocation taxes written down

There are two main methods that an employer can use to handle their employee’s relocation payment. The first is with a relocation package that has different types of packages in it for the employer to choose from. Such as Lump Sum, Tiered ones, or Budget Managed. A relocation package is presented to the employee to start the relocation process. This means that the relocation allowance is paid to the employee when they accept the idea of relocating for their work before the moving process is finished. 

A relocation reimbursement occurs after the move is done. This is when the employee covers the costs themselves and the employer pays as much as is negotiated back to them after the moving process is over. In either method, receipts must be kept.

Shyft - Relocation Help

A huge group of happy co-workers posing for the camera after relocating to a new office

While there can be a lot on the mind of the employer regarding relocating their employees, the organization of their move does not have to be one of them. There is Shyft, the world's first tech-driven moving platform where we organize the whole move for every one of the employees and even the employer. To contact us, check out our Shyft Moving to fill out the form that is there. From here your own Move Manager will contact you or your employees through the free-downloadable ShyftNext.  

It is here that you will get more information, and that the Move Coach will create the inventory list. What is more, is that every employee will get their own Move Manager to only focus on their particular relocation process.

Plus, when the inventory list has been okayed by the employee, we will present this as long as the moving information to our secure bidding platform where professional, verified and experienced moving companies bid on projects. The moving quotes are then sent to the employee or employer to decide which mover to work with. Furthermore, all the moving quotes are fixed prices. It is with Shyft that people have managed to save up to $600 on their move.  

And, we are on call all the time, 24/7, at weekends, and evenings if you have any questions or need advice. Plus, all employers can have access to our ShyftCard. This is a secure platform where employers send their employees' relocation funds directly. It is also where the employers can keep up-to-date with how the funds are being used. Contact Shyft to learn more, and speak to your tax advisor on relocation expenses taxes as soon as possible.

Co-workers giving a high-five in their new office space after relocating for a new job