Relocation's Biggest Blind Spot: Why Gross-Up is Costing Companies—and Financially Burdening Employees
The cost of relocating an employee is a major investment, and at the heart of that expense sits a line item that is, on average, the single largest part of the spend: tax gross-up.
Yet, for something so financially significant, it remains the most misunderstood component of a relocation package. This isn't just about money—it's about fairness. When a company offers a benefit, the employee should receive the full, intended value, not a surprise tax bill that diminishes their package.
Unfortunately, common mistakes in gross-up calculations and administration can cost companies significant dollars while simultaneously leaving the employee short-changed and with an unexpected tax liability.
The Gross-Up Problem: What's the Point?
Since the 2017 Tax Cuts and Jobs Act, virtually all employer-paid or reimbursed relocation expenses are considered taxable income to the employee (with limited exceptions for active-duty military).
If an employee receives a taxable relocation benefit and is in a certain tax bracket, a portion of that benefit will be owed to the government. A gross-up is an additional payment from the employer designed to cover those taxes, ensuring the employee receives the full net benefit intended by the company.
However, the gross-up payment itself is also taxable, creating a "tax-on-tax" scenario, which is why the calculation is so complex and often botched.
Critical Mistakes: Where Companies Lose Money and Create Employee Tax Burdens
Below are common errors in gross-up calculation and administration that result in over- or under-taxation, creating headaches for HR/Payroll and financial stress for the employee.
1. Using Flat Rate vs. Marginal Rate (Under or Over-Calculating Taxes)
One of the most frequent and costly mistakes is the methodology used for the initial tax estimate.
The Mistake: Using a simple Flat Rate (e.g., the IRS supplemental withholding rate of 22%) for all employees, instead of the more accurate Marginal Rate.
The Impact: This often results in under or over-calculating taxes. A high-earning employee whose true marginal tax rate (Federal, State, Local, FICA) is high will be under-grossed-up, leaving them with a large, unexpected tax bill. Conversely, a lower-earning employee may be over-grossed-up, leading to an unnecessary overpayment of corporate funds.
2. Not Performing a Year-End True-Up
Initial gross-up payments are estimations. Failing to reconcile these estimates at the end of the tax year is a critical oversight.
The Mistake: Not performing a year-end true-up (also known as a "statutory" or "tax-return" reconciliation).
The Impact: This guarantees the initial gross-up is inaccurate. Because the employee’s actual tax bracket and total income for the year are now known, the true-up adjusts the original withholding, correcting any under- or over-calculation. Without it, the company has inaccurate financial records, and the employee is left to settle the debt or claim the refund on their own, negating the "tax-neutral" promise of the benefit.
3. Reporting and Payroll Errors
Mistakes in how the expenses are tracked and reported to payroll systems can lead to double-taxation or incorrect base figures.
Grossing up already reported amounts: If an expense has already been submitted to payroll and a tax withholding applied, running a gross-up on that same dollar amount will cause a massive over-gross-up, resulting in a significant, unnecessary tax expenditure for the company.
Incorrect wage income / Forgetting to audit earnings: Calculating the gross-up using the wrong base salary or forgetting to audit earnings (such as bonuses, stock options, or spousal income often excluded by policy) can inaccurately place the employee in a higher or lower marginal tax bracket for the calculation.
4. Overpayment of Social Security Taxes
Relocation timing can inadvertently lead to unnecessary FICA payments.
The Mistake: Overpayment of Social Security taxes (OASDI) occurs when a relocation expense is grossed-up late in the year after the employee has already earned income that exceeds the annual FICA wage base limit.
The Impact: If the gross-up formula includes an allowance for FICA taxes that the employee no longer owes, the company spends more on taxes than necessary. While the employee may eventually get a credit, it complicates payroll and finance reconciliation.
The Bottom Line: Get It Right
Gross-up isn't just a complex math problem—it's a crucial aspect of the employee experience and talent retention.
When gross-up is handled poorly, the employee feels diminished and unsupported, as the promised benefit is eroded by a surprise tax liability. This can completely negate the goodwill of a generous relocation package.
By moving beyond simple, inaccurate flat rates and committing to accurate marginal-rate calculations and year-end true-ups, companies can ensure that their significant investment in gross-up is spent efficiently, their payroll is compliant, and their relocating employees feel truly supported. Fairness is the best policy, and in relocation, fairness is found in accuracy and diligence.
Stop Overpaying. Start Auditing.
Is your company leaving money on the table or risking employee resentment?
Take advantage of Orion’s complimentary gross-up audit. We’ll review your current methodology to identify hidden overpayments and compliance risks, ensuring you stop overspending while delivering the full intended value of your relocation package to every employee.