Lump-sum relocation packages can be a convenient method of managing transferees’ moving and relocation expenses. Employees are handed a check and determine exactly how they would like to allocate that check for their relocation costs. While a lump-sum method is quick, neat, and easy, it can also be a payroll nightmare.
Because lump-sum relocation policies are subject to income tax, they carry a double negative: increased costs for the company and reduced benefits for the employee. Additionally, lump-sum policies add many administrative burdens for payroll, including detailed recordkeeping, withholding, reporting, and other administrative tasks.
There must be a better way to handle moving expenses for transferees. One such path to a dreamier existence would be if your company didn’t have to pay FICA on every relocation expense or allowance. Or better yet, if the bulk of your company’s relocation packages didn’t have to go through payroll at all. Let’s first better understand lump-sum payments.
Payroll Implications of Lump-Sum Relocation Packages
Relocation assistance helps employees manage the cost of a job-related move. To reduce administrative hassles, many companies have adopted the lump sum as a way to supplement employee relocation. Traditional lump sums are flexible, allowing transferees to spend a specified amount however they see fit. How much the transferee allocates to various relocation categories is irrelevant, as is whether the transferee even spends the entire amount for relocation purposes.
The advantage of the traditional lump-sum relocation package is that it’s neat, tidy, and efficient. It puts less strain on the human resources team, has a lower front-end cost, and seems to be a great “hands-off” approach to manage employee relocation. With a lump-sum policy, transferees have maximum flexibility, and employers can simply pay relocating employees with a one-time dollar amount.
The Tax Catch
There’s always a catch, and here it is: Lump-sum relocation payments are as fully taxable as earnings. Though they have a lower front-end cost, the fact that lump-sum payments are subject to income tax can lead to a much higher cost than originally anticipated. And that creates several challenges for payroll teams and transferees:
- Administrative Burdens—Since lump-sum payments have to be administered as taxable earnings, payroll teams have to perform recordkeeping, withholding, reporting, and other administrative tasks. In addition, employees have to be trained on how to properly account for their costs in order to be eligible for tax deductions.
- Increased Costs—Though lump sums have a lower initial cost, due to taxes, they end up being more expensive in the long run. As earned income, lump-sum payments are subject to FICA. Consequently, both the employer and the transferee have to pay 7.65% in FICA tax on the lump-sum amount.
- Reduced Benefits—For transferees, total tax liability can amount to 40% to 45% of the lump-sum payment. Unless the employer grosses up the amount of the lump-sum payment to offset the tax liability, the net benefit can fall significantly short of the amount the transferee needs to cover relocation expenses. For example, with a lump sum, a $12,000 relocation check becomes $7,800 assuming a 35% tax, meaning the gross lump sum from the employer must be $16,200 for the transferee to receive the full $12,000.
While the lump sum has been a popular approach for employers to use when relocating employees, it’s somewhat similar to throwing money into a black hole as there’s limited visibility into how transferees are spending this money even if there is enough. Employees are also left to decide for themselves whom to trust with moving tasks and, as a result, are likely to pick the cheapest option rather than a trusted vendor, which can lead to even more costs and complications down the road.
The Technology-as-the-Middleman Approach
Over the past 10 years, technology has reinvented the way companies handle relocation, and lump-sum policies are no exception. The use of relocation technology and software has created the opportunity for employers and transferees to revamp the lump-sum approach. Instead of requiring transferees to manage the payment of relocation expenses, employers can use relocation management software as a middleman between the company and relocation suppliers.
For example, an employer can use software to identify suppliers for core benefits such as moving household goods and housing as well as optional relocation benefits. These may include pet transportation, language courses, etc., that transferees can select cafeteria-style.
This policy structure is known as core/flex, as it provides transferees with a core set of benefits and then employers can include or exclude other optional benefits as needed by the employee.
Core/flex alleviates lump-sum issues such as administrative burdens and increased cost by offering a “build-it-yourself” approach. Relocation benefits can be better tailored to employee needs. Core/flex provides a transparent, yet hands-off, cost allocation approach for HR and payroll staff, and it controls costs by offering benefits that are uniquely meaningful to each individual employee. Though the core/flex administration can be more complex than the lump-sum approach, relocation software helps minimize the guesswork.
Some relocation management software platforms allow employers to pay suppliers directly. This eliminates the payroll hassles commonly associated with a lump-sum relocation approach and provides significant tax benefits.
Additional benefits of relocation technology include:
- Cost efficiency—Using relocation software increases the efficiency of your payroll team by eliminating lump-sum payroll requirements. It also makes the entire relocation process more cost-efficient because suppliers are vetted for value and reliability by the software platform, rather than by transferees who may not be as well-equipped to evaluate these services. Group buying power further reduces the cost of relocation.
- Tax savings—The use of relocation technology to avoid lump-sum payments reduces tax administration and provides significant tax savings for both employers and transferees. By paying suppliers directly, your organization can instantly save 7.65% of relocation package costs (the employer portion of FICA).
- Organization—A number of tasks go into relocation, and these tasks, when postponed or even forgotten, can add up to large fees.
For example, companies can save a significant amount of relocation costs by purchasing a plane ticket many weeks in advance. Software provides an incredible advantage to keep all tasks and purchases organized on a single platform.
- Employee Satisfaction—Increased employee satisfaction is another important benefit of using relocation technology to circumvent traditional lump-sum relocation packages.
With a lump-sum policy, employees are expected to allocate all moving costs on their own. To make the most of their relocation checks, employees tend to choose the first low-price supplier they can find, causing even more problems down the road (i.e. lost or damaged moving boxes, delayed car delivery, etc.).
A job-based relocation is stressful enough, and managing the budget for core relocation expenses can be overwhelming. Direct payments reduce anxiety and help set the stage for a smooth transition into the new office.
Relocation packages can be structured in a variety of ways. It’s important to note that lump-sum packages still have value for some employers and relocation scenarios. But by using technology as a third party, it’s possible to reduce the costs and headaches that traditional lump-sum packages create for payroll teams and transferees.