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By utilizing ARSI expense management services, we can moderate your company’s burden of complying with the constant changing tax rules and regulations. We ensure that your results are accurate, consistent, and support your policy objectives. As an extension of your company’s relocation department, ARSI is ready to help our clients provide the services that will increase employee satisfaction and retention.

Reporting relocation expenses correctly is one of the most overlooked items for companies that offer relocation benefits to their employees.   That is why many companies hire All Relocation Services to track, code and provide a summation report for all relocation expenses during and after an employee relocation. This report categorizes all of the relocation expenses as taxable or non-taxable per the IRS guideline.

Calculating Gross-Up Step one: Determine the method

Inverse Method:

The inverse method is the most common gross-up method used by companies offering relocation benefits. This calculates tax on the tax for the non-deductable relocation benefits keeping the net payment/reimbursement close to the original gross amount.  See inverse example below:

Formula:

Net/(1-TR)          =             Gross

Net                       =             Net amount to employee

TR                         =             Tax rate

Gross                    =             Gross amount required to be paid

 

Example: Tax rate 20%; Expense amount $10,000

$10,000/(1-.2)

$10,000/.8 = $12,500

 

Proof:

Gross payment $12,500

Tax rate x 20%

Tax $ 2,500

Net payment: $12,500 – $2,500 = $10,000


Flat Method

The flat method is used by very few companies offering relocation benefits because it does supplement the employee’s tax consequence. This method simply uses a flat rate (typically 25%) that is determined by the company’s relocation policy and that rate is calculated one time for the non-deductable relocation expenses. See flat example below:

This method is simple multiplication

Formula:

TR x Expense amount

TR = Tax rate

 

Example: Tax rate 20%; Expense amount $10,000

Tax 20% x $10,000 = $2,000

Gross payment $12,000

 

Net payment $12,000 – $2,000 = $10,000

Problem? 20% x $12,000 = $2,400; $12,000 – $2,400 = 9,600

Calculating Gross-Up Step two: Determine the rate

*Supplemental

This rate is used the most as it is based on the specific tax authority (State or Federal) and the rate set up by that authority for withholding on a supplemental or fringe benefit payment (i.e., 25% for Federal).

*Marginal

This rate is not common because the employee is over grossed-up as it is based on the actual tax brackets for the specific tax authority. For example, Federal has tax brackets of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% which vary based on taxable income and filing status. This means an employee who is married and makes $50,000 appears to fall into the 15% bracket. However, itemized deductions and personal exemptions bring their taxable income down to the 10% bracket.

*Fixed

This rate is user defined/preference which is usually based upon a relocation policy.

Conclusion:

In the past, it was common for companies to reimburse moving expenses throughout the year, and then report them to payroll once at year-end. Moving Expenses are treated as supplemental wages, and should be added to the employee’s wages throughout the year with appropriate withholding.

While gross-up is a benefit, payroll withholding is a requirement. Many companies now use a flat or inverse gross-up throughout the year to meet withholding requirements. They then do a year-end Tax True Up, using Income Tax Tables, to more accurately reflect the tax situation of the employee because of the move

The most common gross-up policy is Inverse Supplemental because it keeps the employee as whole as possible without over gross-up the non-deductable relocation expenses.