Gross-Up is the additional gross income added to the salary by your employers which will help relieve you from tax liabilities. This gross amount will be owed in taxes that are associated with expenses after the relocation. If your relocation costs INR 5000 taxable money, the employer will allocate a total of INR 7500. This will allow employees to get the complete benefit of INR 5000. The estimated tax of INR 2500 will be paid by the employer. If you are employed, then taxes are a fact of life. A tax calculator can relieve you of the burden of doing this exorbitant task every year. You can review the new and old tax regimes to choose what benefits you the most. It will be vital to understand the benefits of both the tax regimes.
As per government tax regime, the employers should deduct taxes from the employee’s salary. Practically everything is taxed in the corporate world. This also includes relocation packages offered by the employees. Any relocation expenses made to a transfer or payment made to any vendor on behalf of the transfer should be reported as taxable income of the employee which is subjected to IRS regulations. Grossing up can add up to 55% more taxable relocation costs. It is not happy news for employees to know that relocation bonuses will add to their tax burden. Gross up is money well spent if the employers are concerned about their employee’s happiness.
There are three methods to calculate the gross-up which are, The Flat Method, The Supplemental/ Inverse Method and The Marginal/Inverse Method. The flat method is a percentage calculated on the taxable income which is added to the income as gross-up. For example, if the percentage is 25% for taxable expenses and the transferee is entitled to a relocation bonus of $1000 then he will receive a total benefit of $1250 after adding the gross-up of $250. This gross-up is also taxable income and will have an additional tax liability. This method does not cover the employee’s tax liability and the formula is not compliant with IRS supplemental withholding regulations.
The Supplement/Inverse Method is a formula that considers both relocation expenses and the gross-up as taxable income. So, the employer will pay both the gross-up and gross upon the gross-up as well. In this, the gross-up is derived by adding the tax rates and dividing the taxable expense. This number is subtracted from the taxable expense. This method will not reflect the tax bracket of the concerned employee. The Marginal/Inverse Method is used by relocation companies or CPA incorporates tax on all tax calculations. This method takes into consideration IRS form 1040 tax filing status and employee income. Only income earned from the company will be considered. The three tax formulas can calculate the gross-up of taxable expenses or relocation bonus. You can consider approaching a relocation professional to understand the basics. It is something you need to know before availing taxable expenses.