This document discusses common mistakes made in gross-up analysis for employee transfers and relocations. It provides examples of situations where using annualized salaries versus year-to-date earnings, itemized deductions versus standard deductions, and other factors could result in over- or under-grossing employees. It recommends breaking out homeowners from renters, using a third-party home sale program, and only grossing up for qualified relocation expenses to improve accuracy.

2. Presented by
Quentin Hormel, CRP

3. 1.Transferee Communication
2.Common Gross-up Analysis
Mistakes
3.Gross-up Decisions

4. 1. Watch withholdings – adjust W-4 if necessary.
2. Complete new work state W-4 and give to payroll as soon as
working in new state.
3. Local income tax?
4. Greater chance for underwithholding penalties the year
after the move. Safe harbor rules:
• owe less than $1,000.
• pay 90% of tax liability during year.
• pay 100% of previous year’s tax liability in withholdings
and estimated payments during year (if previous year’s
AGI exceeds $150,000 / $75,000 if MFS, then 110%).
• previous year’s tax liability is $0 and tax year was twelve
months.

5. Year Before Move: SNG, $100,000 AGI, $15,000 tax liability
Year of Move: $105,000 + $40,000 taxable relo = $145,000 AGI,
($24,000 - $4,000 y/e adj. = $20,000 w/h), $25,000 tax liability (owe
$5,000 at tax time):
1. $5,000 > $1,000 (fail)
2. $20,000 / $25,000 = 80% (fail)
3. $20,000 > $15,000 (pass)
Year After Move: $110,000 AGI, $14,000 w/h, $16,000 tax liability
(owe $2,000 at tax time):
1. $2,000 > $1,000 (fail)
2. $14,000 / $16,000 = 87.5% (fail)
3. $14,000 < $25,000 (fail)

6. 5. Warn transferees if running a year-end delta with negative
adjustments.
6. Tell transferees to save receipts for transit costs and final
move expenses that aren’t reimbursed. Might be able to take
deduction on the 3903, even if given lump sum to cover such
costs.
7. Transferees can take deduction for transit costs and final
move expenses that aren’t reimbursed regardless if they are
non-itemizers.
8. Form 3903 required if W-2 Box 12-P has dollar amount.
9. Transferees should not take double deduction for transit costs
and final move expenses appearing on the W-2 Box 12-P.

7. $10,000 van line – reimbursed directly to vendor
$1,000 FM airfare – reimbursed to employee (W-2 box 12-P)
$100 tip to movers – not reimbursed

8. 10. Alert transferees to year-end cutoff date for
submitting expenses.
11. Deductible final move expenses are available for
those that live in both the old home and new home,
including those in college and excluding tenants and
employees.
12. The balance of non-amortized points on a refinanced
loan can be taken as deduction.
13. Warn of late-year deductibles – extra dollars saved
this year might go back to IRS next year.

9. • 11/30/13 Expense cutoff
• 12/15/13 Close on home, $6,000 points
• Won’t show on W-2 this year but company
reimburses employee
• This year’s tax return: $6,000 deduction -
$2,000 tax savings
• Next year’s tax return: $6,000 included in
taxable earnings on W-2, no Federal
withholding to cover the taxes, no deduction
available – will pay $2,000 more in taxes

10. 1. Part year and non-resident state returns prepared
incorrectly.
2. Preparer is unfamiliar with the company’s gross-up
policy. Some taxable expenses might not be grossed
up.
3. Spousal and outside income might not be part of the
company’s gross-up policy.
4. New residence points are incorrectly deducted on
the “without move” side.
5. Form 3903 prepared incorrectly.

11. If the number in Box 12-P is not carried to line 4 of the 3903:

12. 6. State and local gross-ups are incorrectly
deducted on the “without move” side.
7. AMT Tax and its complexity during audits.
8. Many other areas (ie credit and deduction
phaseouts) not typically grossed up at year-
end. The company may/may not decide to
include as part of audit.
9. Failure to recapture any excess FICA tax
withheld.

13. If the individual worked only for one company:
$160,000 earnings, FICA w/h = $113,700 x 6.2% = $7,049.40
If the individual worked for two companies during the year:
1/1-6/30: $80,000 earnings, FICA w/h = $80k x 6.2% = $4,960
7/1-12/31: $80,000 earnings, FICA w/h = $80k x 6.2% = $4,960
Excess is deducted on line 69 of 1040:
FICA paid ($4,960 + $4,960) – Max ($7,049.40) = $2,870.60

14. 1. Use flat tax rate vs. using tax tables.
2. Gross up for to-state vs. from state vs. both
states.
3. Gross up for Soc. Sec. tax.
4. Gross up for Medicare tax.
5. Gross up for Local tax.
6. Gross up for any loss of the child tax
credit. (Recommendation: do not gross up at
year-end)

15. Transferee has $100,000 salary, 2 children under 17,
taxable relo of $40,000:
• Without move, estimate $2,000 credit
• With move, only getting $500 credit
• If grossing up, then $1,500 + $800 gross-up = $2,300
If spousal/outside income was $50,000:
• Without move, $150,000 AGI = no credit
If policy set to gross up, then company provided $2,300
more in gross-up than what was deserved.

16. Transferee has $70,000 salary, 2 children under 17, taxable
relo of $40,000:
• Without move, estimate $2,000 credit
• With move, estimate $2,000 credit
• $0 of additional gross-up
If spousal/outside income was $50,000:
• Without move, $120,000 AGI = $1,500 credit
• With move, $160,000 AGI = $0 credit
If policy set to gross up, then company provided $1,500 +
too little in gross-up.

17. 7. Include FICA gross-up in the Federal
gross-up calculation. (circular logic)
8. Gross up for any loss of itemized
deductions/exemptions.
9. Annualized salaries vs. YTD earnings
for Federal wages. (Recommendation:
use YTD earnings for college new hires and
use annualized salaries for experienced new
hires)

18. New hire, single, no previous earnings during year,
annual salary of $60,000, hired on 11/1:
• Using annualized salary ($60,000), Federal gross-
up will be calculated at 25%.
• Using YTD earnings, Federal gross-up will be
based on $10,000 of AGI with gross-up calculated
at 10%.
In reality, $10,000 is closer to actual AGI and 10%
rate would give the better calculation.

19. New hire, single, $50,000 in previous earnings during
year (1/1-10/31), annual salary of $60,000 with new
company, hired on 11/1:
• Using annualized salary ($60,000), Federal gross-
up will be calculated at 25%.
• Using YTD earnings, Federal gross-up will be
based on $10,000 of AGI with gross-up calculated
at 10%.
In reality, $60,000 is closer to actual AGI and 25%
rate would give the better calculation.

20. 10. Use sales tax deduction tables.
11. Gross up for unqualified moves.
12. Use itemized deduction tables vs. flat
percentage.
13. Look at homeowners vs. renters.
(itemizers vs. non-itemizers)
(Recommendation: break out homeowners
from renters)

21. If using standard deduction for all:
Transferee has $100,000 salary, single:
• Deduction would be $6,100 (+$3,900 exemption) –
taxable income is $90,000 – tax bracket is 28%.
• If actually a homeowner (itemizer), the average
deduction is about $20,000 (+$3,900 exemption) –
taxable income is $76,100 – tax bracket is 25%.
Will likely over gross up many, especially
homeowners (itemizers).

22. If using itemized deduction estimate for all:
Transferee has $100,000 salary, single:
• The average deduction is about $20,000 (+$3,900
exemption) – taxable income is $76,100 – tax
bracket is 25%.
• If actually a renter (non-itemizer), the standard
deduction is $6,100 (+$3,900 exemption) – taxable
income is $90,000 – tax bracket is 28%.
Will likely under gross up many, especially renters
(non-itemizers).

23. 14. Gross up for MEA.
15. Gross up for loss on sales.
16. Gross up for COLA or MIDA.
17. Gross up for home sale bonus.
18. Follow a third party home sale program.
(Recommendation: yes! – big savings on gross-
ups)
19. Gross up for any taxable expense. (The
average gross-up is 58-60% of expense amount)

24. Quentin Hormel, CRP
Qhormel@orionmobility.com
203-563-2119
www.orionmobility.com

25. Thank You!
For more on Tax, Relocation, Legal and Payroll visit our blog at:
Blog.orionmobility.com
Follow us on Twitter
@Orion_Mobility
For more visit our website:
www.orionmobility.com