This article originally appeared in the October 2018 edition of Mobility Magazine.
Julie was recruited to take on an executive role at a fast-growing startup, but it required her to relocate from Chicago to Cleveland. The company’s recruiter considered Julie a “purple unicorn,” which means a rare find, and offered her a generous salary of $350,000 with a competitive relocation package of $30,000. Julie and her family decided to transition to a smaller city because of this opportunity. In addition to being a boost to Julie’s career, the move led to a larger house in a quiet suburb complete with an exceptional school district.
Months passed as Julie and her family settled in to their new community. After spending the holidays in the new home, Julie met with her accountant. Much to Julie’s surprise, she owed more than $11,000 in income tax.
“It’s due to the reimbursements you received for your relocation expenses,” the accountant explained. “It wasn’t grossed up properly.”
Julie was not expecting this financial liability and felt her company had overlooked a large detail in an otherwise well-planned relocation.
Related: 4 States Sue U.S. Federal Government Over State & Local Tax Deduction Limit
In the U.S., Julie’s scenario is not unique, and on the other end of the spectrum, some transferees are overpaid and receive larger-than-expected tax refunds. Neither scenario is ideal. When transferees get a larger refund, they will be happy (although they may not recognize the reason for the increased payout), but it puts a lot of strain on the organization’s global mobility budget.
What causes these differences? The gross-up policy. Setting a policy doesn’t simply entail making a decision on whether to gross up or not—there are many other factors to consider, such as the gross-up rate and whether to gross up the gross-up. All these decisions impact the amount a transferee receives.
If each transferee is impacted differently, what’s the proper approach? Establishing the optimal gross-up policy means rightsizing it to fit your company’s relocation program objectives, or better yet, the company’s overall business objectives.
A highly innovative technology company whose employees are its most important asset may err on the side of caution and establish a very generous gross-up policy to make sure the employees are not paying out of pocket and have a great relocation experience.
A company that is struggling financially may need to focus more on cost and set a gross-up policy that fits within the global mobility budget.
Rightsizing entails a thorough review of your policy, your options, and the impact of your options. While it requires some investment, overlooking this exercise may be shortsighted.
A properly structured policy can yield cost savings and/or improve the transferee experience.
Securing gross-up funds becomes easier when proposed budgets are backed by data and sync with company objectives.
Understanding how recent tax changes affect gross-up helps mobility teams avoid surprises and educate transferees.
When defining the gross-up policy, one of the first decisions you need to make is what gross-up rate to apply. There are generally three options:
Related: U.S. State Conformity to Tax Reform Moving Expense Change
Whatever gross-up rate you choose, the gross-up payments are in turn taxable. It is therefore common to “gross up the gross-up” and mitigate the tax-on-tax exposure. There are generally two options:
How do the different rates and calculation methods impact the gross-up?
Read the rest of this article in the October 2018 edition of Mobility Magazine.