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An employee moves from your Dallas office to your Chicago location. You cover the moving costs — truck rental, temporary housing, a travel allowance. All reasonable business expenses, right? Under current tax law, every dollar of that reimbursement is taxable compensation to the employee unless it falls under a narrow exception. The company-paid relocation that felt like a benefit now shows up as taxable income on their W-2, and payroll needs to withhold accordingly.
The Tax Cuts and Jobs Act of 2017 suspended the moving expense deduction and exclusion for most employees through 2025, with the exception carved out for active-duty military personnel. That means relocation benefits that were once excludable from income — and tax-free to the employee — are now treated as ordinary wages. If you’re still operating on pre-2017 assumptions about relocation tax treatment, this guide covers what’s actually required now.
What Relocation Benefits Are Taxable
Under current rules, virtually all employer-provided relocation benefits are taxable income to the employee. This includes direct payment of moving company costs, reimbursement of moving expenses, temporary housing allowances, travel stipends for house-hunting trips, real estate transaction assistance (closing costs, realtor fees), loss-on-sale assistance for the employee’s prior home, and relocation bonuses paid in lieu of expense reimbursement. All of these are treated as additional wages, subject to federal income tax withholding, Social Security, and Medicare.
The taxability applies whether the employer pays the vendor directly or reimburses the employee. The key isn’t the payment method — it’s that the employee received a benefit with economic value as compensation for relocating at the employer’s request. That economic value is income.
Gross-Up: What It Is and When Employers Use It
Gross-up is the practice of paying the employee additional compensation to cover the income taxes they’ll owe on a taxable benefit. If you pay $10,000 in moving expenses and that $10,000 is taxable income, the employee nets less than $10,000 in actual benefit after taxes. Gross-up adds enough additional compensation so that after taxes, the employee’s net benefit equals the intended amount.
The calculation isn’t straightforward. The gross-up itself is also taxable, which means you’re grossing up the gross-up. The correct calculation requires knowing the employee’s marginal federal tax rate, applicable state tax rate, and FICA rate. Payroll systems can run this calculation, but it needs to be set up correctly for each relocation scenario rather than applied as a flat percentage.
Not all employers gross up. It’s an additional cost on top of the relocation benefit itself — typically 30–40% more than the base benefit amount, depending on the employee’s tax bracket and state. But for executive relocation or situations where you want to ensure the employee bears no net tax cost for the move, gross-up is the standard approach.
When the Employee’s State Changes
An interstate relocation changes where the employee pays state income tax. From the payroll side, this requires a withholding update: you start withholding for the new state on the date the employee establishes residency there. If they’re working remotely from the new state before their official start at the new location, withholding for the new state begins when they start working there — not on the date the move is complete or the new assignment officially starts.
The year of the move is where it gets complicated. The employee will have wages earned in two states during the calendar year. Some states have mid-year residency rules that affect how they tax income earned before the move — and the employee may need to file part-year resident returns in both states. Payroll’s job is to withhold correctly for each state during the period the employee works there. The employee’s personal return situation is their responsibility, but accurate withholding during the move year is yours.
Relocation Repayment Agreements
Most employers who provide relocation assistance require the employee to repay some or all of it if they leave within a defined period — typically one to two years. These repayment agreements need to be structured carefully to avoid creating an unintended tax result. If the employee repays the relocation benefit in the same tax year it was paid, the repayment reduces their taxable income for that year. If they repay in a subsequent year, the tax treatment is more complex and may require a wage correction or a separate tax credit claim — the mechanics vary based on the repayment amount.
Payroll needs to know about relocation repayments when they happen so the W-2 can be adjusted correctly for same-year repayments, and so any required corrections are processed before year-end. Repayments that happen in January for a prior-year benefit are a particular pain point if HR doesn’t notify payroll in time to handle the correction properly.
How to Handle Relocation in Payroll
The cleanest approach is to treat all relocation benefits as supplemental wages at the time they’re provided. Use the supplemental withholding rate (22% federal for amounts under $1 million) or aggregate the relocation amount with the employee’s regular pay for the period and withhold at their normal withholding rate. Either method is permissible; consistency in how you handle it matters for both accuracy and W-2 reporting.
Netchex supports supplemental wage processing, state withholding updates for relocated employees, and gross-up calculations within the payroll system. For employers who relocate employees regularly, having that infrastructure in place before the first relocation is a lot less stressful than building it case by case. Talk to a Netchex consultant about relocation payroll processing for your team.
Frequently Asked Questions
For most employees, no. The Tax Cuts and Jobs Act of 2017 suspended the exclusion for qualified moving expense reimbursements through 2025. That means employer-provided relocation benefits that were previously excludable from income — and therefore tax-free to the employee — are now treated as taxable wages for most workers. The exception is active-duty military personnel relocating under military orders, who can still exclude qualified moving expense reimbursements. The TCJA provisions affecting relocation may be revisited when those provisions are set to expire.
Gross-up is additional compensation paid by the employer to cover the income taxes the employee owes on a taxable benefit. For relocation, it means paying the employee enough above the moving cost reimbursement so that after they pay taxes on the total, they net the full intended benefit. Not every employer provides gross-up — it adds 30-40% or more to the cost of the relocation package depending on the employee’s tax bracket and state. It’s most commonly used for executive relocations or situations where the employer wants to ensure the move is genuinely cost-neutral for the employee.
State income tax withholding changes when the employee starts working in the new state — not necessarily when the move is officially complete or when the new assignment formally begins. If the employee works remotely from the new state before their official start date, withholding for the new state begins when they start performing work there. For the year of the move, the employee will have income subject to withholding in two states, and may need to file part-year resident returns in both.
If the employee repays the relocation benefit in the same calendar year it was paid, the repayment reduces their taxable wages for that year and the W-2 can be adjusted accordingly. If the repayment happens in a subsequent year, the tax treatment is more complex: the employee may be able to claim a credit or deduction for the repayment on their personal return, but the prior-year W-2 typically isn’t amended. Payroll needs to be notified of repayments promptly — especially same-year repayments — to handle W-2 adjustments before year-end processing.
Relocating Employees? Let’s Make Sure Payroll Is Ready.
See how Netchex handles supplemental wage processing, state withholding transitions, and gross-up calculations for employee relocation packages.
This guide reflects publicly available product information and independent reviewer data (G2, Capterra, Trustpilot, Yelp, Better Business Bureau, Reddit, Software Advice, GetApp) as of 2026. Feature availability and pricing may vary by plan. Contact each provider for current details.
Disclaimer: Any product roadmap or future plans provided herein are for informational purposes only. They do not represent a commitment to deliver any material, code, feature, or functionality. Plans may change without notification. The development, release and timing of any features or functionality described remain at the sole discretion of Netchex, its affiliates, and partners. Netchex does not give legal, tax, or accounting advice. You are responsible for ensuring your use of Netchex product meets your individual business and compliance requirements.
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