How to Manage a Lump Sum Move
Does your employee relocation package include a lump sum for moving expenses? If so, it’s important to know how to get the most out of your lump sum package so that you, and your employer, have a positive relocation experience.
Employee Relocation Package and Taxes*
Lump Sum payments to individuals for relocation expenses, including moving, are fully taxable as earnings. While some employees receive some tax assistance, or “grossed up,” lump sum packages in order to take home the full amount recommended for moving, others do not. Understandably, this creates a dilemma for transferees because there is often not enough money after taxes are deducted (about 40-45 percent) to pay for all of the things that the relocation package intended to cover.
Payments made directly by your employer for household goods moving services to the moving company, however, are excludable and do not need to be reported on your Form W-2 or IRS Form 3903. Therefore, if your company arranges a direct billing agreement with a provider for household goods moving, 30 days or less of storage, automobile transportation, etc. it will save both of you a taxation headache (in terms of timing and deductions). Direct billing arrangements also have other potential advantages, including replacement coverage for damaged or lost items at no cost to you, as well as moving priority.
If your company would prefer to avoid a direct billing arrangement for the whole employee relocation package, you can ask them to include just your moving expenses on an expense report which you will submit for reimbursement. This will prevent you from being taxed on these exempt items. You will still list your moving expenses on IRS Form 3903 and they will show up in Box 12P of your Form W-2, but they will not be considered income. In this case, your moving expenses are being paid outside of the lump sum, so your actual lump sum payment will be less, which is a benefit to you because it’s still being taxed as income. The remaining funds in your lump sum payment can be spent on other relocation items that your company intended to cover including a home finding trip, temporary living, and other relocation incidentals such as a new driver’s license, baby-sitters, cable setup, utilities and more.
If a direct billing agreement, or an expense agreement, is not arranged, you will be taxed on moving expenses upfront (as part of the 40-45 percent lump sum tax) and will have to wait until year end to claim your tax refund. You can claim the refund by filing IRS Form 3903 with your tax return to receive credit for taxes withheld in connection with the household goods moving portion of the lump sum payment.
Finding a Mover
When you are relocating for work, it’s important to pick a mover that has experience handling corporate relocations. They should be sensitive to time and have a professional customer service team to help ensure that your move goes as smoothly as possible, so that you can get right to work.
A good moving company will understand that you want to minimize your expenses. However, they should also advise you of moving best practices to protect you and your valuables. You should always make sure that the moving company employees are background checked, appropriately licensed and have a good safety record. Further, it’s important that they willing to work with you to expedite settlement in event of a claim – take the time to ask them about their claim and valuation policies upfront, so that you know what to expect.
If it Sounds too Good to be True…
There are movers that are giving lower moving estimates in order to fit into your lump sum budgets. Some of those moving estimates may be legitimate. However, it’s important to know that some are ploys to book your move. In the latter case, you will likely be charged much more in the end and/or be subject to other customer service issues. Click here to learn more about avoiding a moving scam.
*Holman Moving Systems does not advise on any personal income tax requirements or issues. Use of any information from this site or any other web site referred to is for general information only and does not represent personal tax advice either expressed or implied. You are encouraged to seek professional tax advice for personal income tax questions and assistance.