I currently live in NY state but will be relocating to PA. My company gave me a lump sum relocation package, grossed up to $5,000. My fiancé is telling me that I should put money aside for tax season. So 2 questions:

1 - Do I need to put money aside?
2 - How much approx?

"Grossed up" means that your employer recognizes that when they pay you to move the benefit is taxabe, so they give you a bit more with the intention of making you whole after you pay taxes. Now we can't guess what your tax bill will be for this $5K benefit - it will depend on your total income, deductions, exemptions, state tax rate, etc. But for ballpark planning purposes for now you may want to assume 25% for the feds and another 6.85% for the state of NY.

Here is what my HR department said...

" The check is for a straight $5,000. Relocation payments are grossed up, so the employee doesn't pay the taxes the company does."

This implies (at least to me) that AFTER taxes, my check is $5K... So the additional $5K would be treated as income and not a bonus...

Do I make sense?

Here's the math as best I can estimate. In order to get you a check for $5K, they will actually have to pay you substantially more - I estimate about $8264. From this they will withhold 25% for the feds, 6.85% for NY State, 6.2% for social security, and 1.45% for medicaire - that's a total of $3265 taken out for taxes, netting you an after-tax check of $5000. I was only pointing out that your employer really doesn't know the exact amount to pay out in order to net you precisely $5K after taxes, given that they don't know what your true marginal tax rate is. So depending on whether you have other sources of income, your deductions, exemptions, your AMT status, etc you may well be paying the IRS a marginal tax rate that is something different than 25%.

The distribution, whatever it is, is subject to INCOME taxes (state and federal).

It has been my experience that reimbursements for moving expenses are normally NOT subject to FICA taxes.

I believe your company expects that your total moving expenses will be somewhat LESS than $5,000. However, they are giving your $5,000 to give you're the additional funds needed to pay the income taxes that will be due.

First, the best person to ask this is your HR rep. Second, you are reading the implications wrong.

Some questions, did you submit estimates for bills for moving expenses? Did the check come with a statement of withholding?

Gross up means that the company is estimating the tax consequences of the benefit being given you. So they are increasing the amount being paid to you to account for that tax consequence. Unless you got a statement of withholding, then you will be responsible for paying the taxes out of the amount paid you. You will probably receive a 1099 for the amount. It also means that the actual or extimated amount of your moving expenses was deemed to be something less than $5K.

Scott summarized this situation somewhat better than I did.

Scott and ATE- we won't really know unless NYP comes back with a clarification, but it's my impression that what she is talking about is not reimbursement for actual expenses incurred, but rather a lump sum bonus payment that is intended to help her offset some of the cost incurred in relocating. I've been through two relocations in the past 5 years, and in both cases the company handed me a lump sum of a certain amount, which they then "grossed up" so that I had a reasonably good chance of actually being able to pocket that amount after taxes. Using NYP's figures as an example, the company pays her a bonus of $8264. They report the $8264 to the IRS in her W2 at the end of the year. The net amount of this paycheck after withholding is the $5K she mentioned. The $8264 is indeed subject to FICA taxes, again, assuming that we're talking about a lump sum "bonus" and not reimbursement for actual expenses incurred.

That's certainly a possibility, which is why I asked the questions I did.

Ebaines:

If your company did in fact pay you a lump sum and document it on your W-2 as a "bonus", then, yes, FICA taxes were due.

However, the corporations that properly track the moving expenses by requiring a moving expense report, then added money to cover the income taxes due on the reimbursement amount, properly report this income in Boxes #1 and #14 of the W-2, but NOT Boxes #3 (for Social Security wages) or #5 (for Medicare wages).

Frankly, I cannot understand WHY companies go with the lump sum option, because when an employee pays FICA taxes, the company ALSO PAYS an equal sum of those taxes.

Further, if an employee is required to properly document their expenses, you will not get the questionable moving costs that routinely appear on such expense reports.

Ebaines:

Frankly, I cannot understand WHY companies go with the lump sum option, because when an employee pays FICA taxes, the company ALSO PAYS an equal sum of those taxes.

Further, if an employee is required to properly document their expenses, you will not get the questionable moving costs that routinely appear on such expense reports.

The lump sum approach recognizes that when you move and set up a new household there are costs you incur that are not true "expenses" in the eyes of the IRS. Some typical examples: the new curtains and rugs that you need for your new house; painting and wall papering of both the new house and the old; replacement items that you have to buy to replace the stuff that you have to leave behind because the moving companies won't transport them, such as house plants, cleaning supplies, perishable food, motor oil, paint, etc.; the restaurant expenses while your stuff is being shipped or the kitchen is being painted; the drivers license and car registration fees in your new state; etc etc. These are all true out-of-pocket costs to the employee. I also suspect that by giving a lump sum the employee feels that they may come out ahead, and perhaps that makes the move a little less of a PITA.

All good points!

There are pros and cons to both methods.