A tax gross-up is added in the cost estimate calculation of relocation benefits, expat assignment benefits, and allowances for a more accurate projection of total cost to company.
When a company provides a cash allowance to an employee, that cash allowance will be considered taxable by tax authorities.
The same goes for non-cash benefits, which may be viewed by inland revenue officers as taxable allowances. This varies depending on the country of tax jurisdiction.
If you want the employee to receive the intended cash allowance and/or non-cash benefits in full and net of taxes, then a tax gross-up is applied so that the company covers its taxes.
For example:
If the Relocation Allowance is USD 10,000
And you want the employee to receive USD 10,000 net in their bank account.
Let’s say that the relocation cash allowance is subject to 15% tax.
This depends on the state/national tax rate)
USD 10,000 / (1 – 15%) = USD 11,764.71
It will take USD 11,764.71 cost to company for the employee to receive USD 10,000 net of tax.
USD 11,764.71 – USD 10,000 = Tax gross-up amount = USD 1,764.71
The same principle applies to Non-Cash benefits.
Temporary Accommodation, Shipment, Airfare, etc are non-cash benefits.
Non-cash benefits may also be taxable, depending on the country of jurisdiction.
For the same reason, a tax gross-up is also applied to the cost of non-cash benefits, for a more accurate projection of the total cost impact to the company.
