While some relocating employees — particularly millennials (born between the early 1980s and early 2000s) — are initially excited to be handed a lump sum of money to spend as they see fit, they often are dismayed to discover that such allowances are treated as taxable income.
According to Jeff Ellman, president and co-founder of UrbanBound, lump-sum allowances usually are taxed around 40 percent. In other words, a $10,000 lump sum is really only worth $6,000 to the employee.
To alleviate the tax burden on its employees, Walmart Stores Inc. tax-assists its lump-sum relocation benefit, says Kandi Kelley-Pritchett, system, payments and compliance manager for Walmart’s corporate relocation shared services. However, companies have to be careful when determining what expenses they tax assist or they may inadvertently “gross up” excludable benefits. (For instance, payments for household-goods moving services made directly by an employer to the moving company are excludable and do not need to be reported by the employee to the Internal Revenue Service.)
“If you give somebody a lump sum and you tax-assist it and part of that lump sum was meant to be used for household goods, you’re giving them more than they really need,” says Donna Barber, manager of consulting solutions at Cartus Corp. “A better approach is to carve out the household goods because of the excludability for income and then give them a lump sum to cover taxable travel and living expenses, like house hunting, temporary living and return trips home. Continue reading here.