Best relocation gross up policy for small employers
Gross up a real relocation package, pay a small moving allowance flat, and never let the offer letter be ambiguous about which one you did. That is the whole policy. The reason it needs stating at all is that the tax rule underneath relocation changed in 2025, and most relocation policies sitting in small company handbooks were written against the old one.
Here is what changed. The Tax Cuts and Jobs Act suspended the tax free treatment of employer paid moving expenses, but it wrote an expiry into the statute: the suspension ran for tax years 2018 through 2025. A lot of policies were drafted on the assumption that 2026 would bring the old rules back. Public Law 119-21, the One Big Beautiful Bill Act, removed that assumption. At section 70113(c) it amended section 132(g)(2) of the Internal Revenue Code to substitute "beginning after 2017" for "2018 through 2025" in the heading, and struck the words ", and before January 1, 2026" out of the text.
What is left is a suspension with a start date and no finish. For a civilian employer there is now no such thing as a tax free relocation reimbursement, and no date on the calendar when that changes. Every dollar you put toward somebody's move is wages. It goes through payroll, it lands on the Form W-2, and IRS Publication 15 lists "payments for nondeductible moving expenses" in its definition of supplemental wages by name.
The four policies, decided
Small employers realistically choose between four designs. The right answer depends far more on the size of the payment than on the size of the company.
| Design | What it costs you on a $15,000 promise | What the employee gets | Admin burden | Choose it when |
|---|---|---|---|---|
| Grossed up lump sum | $22,953.09 | $15,000.00 | One payroll line, one calculation | The package is material, above roughly $10,000, and you want the promise to be literally true |
| Flat lump sum, not grossed up | $16,147.50 | $10,552.50 | One payroll line | The amount is small, and the offer letter says clearly that it is a pre-tax figure |
| Reimbursement against receipts | Up to $22,953.09, plus review time | Up to $15,000.00 | Receipt review, an eligible expense list, disputes | Almost never now, since the tax advantage that justified it is gone |
| Direct vendor payment | Same tax treatment, invoiced to you | The service itself | Vendor selection and management | A senior hire where you want control of the moving company, and you still gross up the tax |
The second row is the one worth staring at. Paying a flat $15,000 with no gross up costs you $16,147.50 once your employer FICA is counted, and the employee receives $10,552.50. You have spent 70% of the grossed up cost to deliver 70% of the grossed up benefit, which is proportionate and perfectly defensible. What is not defensible is spending that money and letting the candidate believe they were getting $15,000.
Where the money actually goes
The arithmetic behind the table is worth seeing once, because the load is higher than most people guess. To put $15,000 in somebody's hands at the 22% federal supplemental rate plus 6.2% social security and 1.45% Medicare, you divide by what is left after 29.65%, which gives a gross of $21,321.96. Withholding takes $6,321.96 of that. Then your own FICA match of 7.65% on the gross adds $1,631.13. Total cash out the door: $22,953.09.
That is a load of 53% on top of the net. It is the single most common surprise in a small company relocation budget, because the $15,000 gets approved as $15,000 and the extra $7,953.09 turns up later as a payroll variance nobody planned. The gross up calculator runs this for any net figure and any state rate, and it solves the arithmetic by iteration rather than a single division, which matters more than it sounds like it should.
Here is why. The textbook formula assumes one rate applies to every dollar of the payment. For a senior hire it often does not. Social security stops at $184,500 of wages for 2026, so a relocation payment to somebody already near that ceiling carries 6.2% on part of itself and nothing on the rest. An employee already paid $180,000 this year who is owed $10,000 net needs a gross of $13,427.82, not the $14,214.64 the formula produces. The formula overstates by $786.82, and that is company money handed over for no reason.
Four clauses your relocation policy needs
The tax treatment is settled now, so the remaining risk in a relocation policy is all in the drafting. Four clauses do most of the work.
1. Say whether the number is gross or net. "We'll cover your move up to $15,000" reads as a net promise to a candidate and as a gross budget to whoever approved it. Pick one and write it. If you are grossing up, the cleanest phrasing states the net the employee will receive and adds that the company will pay the associated tax, so the larger figure on the W-2 is expected rather than alarming.
2. Pay it after the first regular paycheck. This is the clause nobody thinks of. The 22% flat supplemental rate is available only if you withheld income tax from that employee's regular wages in the current or immediately preceding calendar year. A relocation payment made before the new hire's first regular payroll has no such history behind it, so the flat rate is unavailable and you have to use the aggregate method, which produces a rate that depends on their Form W-4. The divisor you quoted in the offer letter stops existing.
3. Write the clawback on the net. Repayment clauses are standard and reasonable: leave within twelve months and a prorated share comes back. Write the repayable amount as the net the employee actually received, not the gross you ran through payroll. Asking a departing employee to repay withholding that went to the IRS rather than to them is hard to enforce and worse to explain, and repayment in a later calendar year creates a tax problem for them that has nothing to do with you.
4. Set the number by level, not by negotiation. Relocation is one of the easiest places for pay inequity to enter a small company, because it is usually negotiated individually and never audited. Two engineers at the same level, hired four months apart, end up $10,000 apart in total first year cash because one of them asked. Tying relocation bands to your job levels the same way you tie salary bands to them closes that hole before it opens.
Lump sum beats reimbursement now, and it is not close
Reimbursement against receipts used to have a real justification: qualified expenses could be reimbursed tax free, so the paperwork bought something. It does not buy anything anymore. Since the exclusion is suspended permanently, a reimbursed dollar and a lump sum dollar are taxed identically, and the reimbursement adds an eligible expense list, a review process and an argument about whether a storage unit counts.
The practical case for a lump sum in a small company is that it is a single decision with a single cost, made once at offer time. The employee decides whether to hire movers or rent a truck and keep the difference, which they are better placed to judge than you are. If you do keep a receipt-based element for a senior hire, the receipts still need somewhere to live and someone to categorize them, and running them through the same expense management workflow that reads and categorizes receipts as the rest of your spend at least keeps the relocation file out of a shared inbox.
One accounting note. Because relocation is wages now rather than a reimbursed business expense, it belongs in compensation cost rather than in travel and entertainment, and it flows through payroll rather than accounts payable. Small finance teams routinely code it to the wrong line, which quietly understates the fully loaded cost of a hire in every model built off that data.
When not to gross up
A gross up is not automatically the generous choice. It is a decision to spend 53 cents on tax for every dollar the employee receives, and there are cases where that money does more elsewhere.
Below about $5,000, the gross up is usually not worth the process. The tax on a flat $3,000 moving allowance is $889.50 at the standard combined rate, which is a real amount but not one that breaks a promise, provided the offer letter said $3,000 before tax. Above roughly $10,000, the position reverses: an ungrossed $15,000 delivers $10,552.50, and a candidate who budgeted a move around $15,000 has a genuine problem on their first payday.
The other case for skipping it is when the relocation is standing in for base pay. If you are offering a large one time payment because the salary is below market for the new location, the gross up is buying you one year of cover on a problem that recurs every year. Money put into base instead compounds, shows up in every future raise, and does not need re-solving at the next hire. That tradeoff is the same one the salary increase calculator prices between a bonus and a raise, and relocation is just a bonus with a moving truck attached.
The policy, in five lines
Relocation support is set by job level, not negotiated. Amounts above $10,000 are grossed up and stated as the net the employee will receive. Amounts below that are paid flat and the offer letter says "before tax" in those words. Payment is made on the first regular payroll after the start date, never before it. Repayment on early departure is prorated over twelve months and calculated on the net.
That is short enough to sit in a handbook and specific enough to survive a candidate asking follow up questions. The change worth acting on this year is the first paragraph of this article: if your policy still contains the phrase "through 2025" anywhere near the words moving expenses, it is describing a rule that no longer has an end date.