In the corporate world, practically everything is taxed, including aspects of relocation packages provided to employees. Can you imagine the look on your employee's face when you gently explain that the generous relocation bonus provided will increase his or her tax burden? It is a guarantee, the once happy employee's mood will change quickly and not for the better. Well, fortunately for these employees, a portion of the tax liability of the relocation package can be covered by tax assistance gross-up paid by the employer.
The flat method is a flat percentage calculated on the taxable expenses and then added to the income. Note that the gross-up is also considered taxable income and may create an additional tax liability to the transferee. Additionally, this tax gross-up formula is not compliant with supplemental withholding regulations. This gross-up formula is often used because not only are relocation expenses considered income, but the gross-up is considered income too.
Therefore employers will pay the gross-up on the gross-up. To determine the amount, add up all the tax rates fed, state, OASDI, SS and then divide the taxable expense by the sum of the tax rates. Take this number and subtract the taxable expense. This methodology covers gross-up on the gross-up, but may not accurately reflect the tax bracket of the employee. This method is typically handled by a CPA or full-service relocation companies and also incorporates the tax on tax calculation.
The difference is this methodology takes into account employee income and IRS Form tax filing status. In most cases policy dictates that only company-earned income will be considered and other forms of income, such as spousal income or investment income, won't be taken into account. These three tax gross-up formulas represent the essentials of grossing up taxable relocation expenses to assist with the employee's relocation tax liability. While one can do the calculations, it is always wiser to seek the help of experienced relocation experts.
When done properly, a tax gross-up can reduce the tax burden on a transferee and offer consistency in records and paperwork to better prepare both the employee and employer for tax filing. That said, if not done correctly, a relocation tax gross-up can result in the following problems:. The IRS has several publications concerning tax consequences of moving expenses, including the gross-up concept, in their Publication "Moving Expenses" and Publication "Selling Your Home.
Depending on a company's calculation method, an employee may still have an additional tax liability. In truth, grossing up is mostly a matter of semantics. It merely restates an employee's salary as the take-home pay rather than gross pay before tax withholding. Some companies prefer the gross-up method, especially when compensating C-level executives and other high-paid employees.
The technique can partially conceal salary expenses during financial reporting. The formula for grossing up is as follows:. With executive pay coming under increased scrutiny in light of the financial crisis, grossing up has grown as an increasingly popular way to pay executives. Nonetheless, several companies have made headlines for employing gross-up tactics with egregious and controversial results.
In addition, with the rise of the gig economy, work from home WFH , and entrepreneurship, grossing up is hard to determine since the total income of the individual is unknown as it includes multiple streams of income in addition to the full-time jobs.
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In life, loans are always more expensive than they appear to be How would you go about calculating the gross receipts? The share issue is good news for the advisers because of the fees they will earn. But they will be part of the total subscription price paid by the investors. So the shape of this grossing-up calculation is similar to the previous one. For Party Pretzel plc share issue to be successful, the company has been advised that it should make the issue by means of a comparison with an appropriate quoted company.
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