What is a Gross Up?
Grossing up is the action of calculating and offsetting the
tax burden associated with reimbursed expenses that are deemed taxable by the
IRS.
Reporting relocation expenses is one of the most complex
issues for human resource professionals. That is why many companies look
to their relocation service provider to track all the expenses and submit a
report during and after an employee relocation that groups or categorizes all of
the relocation expenses as taxable or non-taxable. This service can range
from $300 to $1000 per employee depending on the exact services you procure.
Relocation Benefits offers Expense Administration
services, which is one of the first steps to calculating an employees Gross
Up.
Contact Relocation Benefits
for a free consultation on handling your employees relocation
gross up needs.
Calculating Gross Up
Simple Gross Up
is the most preferred method for human resource
professionals. However, this method does not always compensate the employee in
full for the taxes incurred on reimbursed expenses. The simple calculation
is performed by deciding on a fixed gross up percentage such as the supplemental
tax rate or 28%, 35% or some other arbitrary figure that the company feels it
can afford. Example: $13,000 taxable expenses, multiplied by 28% gross up,
equals $3,640 gross up. This gross up of $3,640 is also taxable to the
employee. Therefore if the employee is in a 30% tax bracket, this gross up
reimbursement is only worth around $2,500.
The Inverse Method is much like the simple gross
up method except it has a tax-on-tax effect. This is calculated by
subtracting the tax rate from one, (1-tax rate). Utilizing the information
from the example above, the calculation would be: 1-.28=.72; $13,000
÷.72 = $18,055 (Gross up amount = $5055).
This method is easy to calculate, offers a tax-on-tax protection and allows for
immediate reporting of taxes. Employees that fall above or below the
calculated tax rate may still have some tax liability or receive too much tax
assistance. However, this method provides a closer approximation of the
true tax liability.
The True Up Method is the best method for making
sure your relocating employee is not under compensated or over compensated by
providing this gross up benefit. This process is commonly performed by a
CPA or by a relocation management company. A gross up calculation is
performed at the time the expense occurs and again at the end of the year prior
to reporting wages on the employees W-2. This year-end true up method may
require you to make a negative adjustment based on the employee's filing status
and overall income.
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