Last week, Marianne Schmidt, our VP of US Domestic Tax and Reporting, conducted an engaging webinar on ways companies can save cost by re-examining their tax gross-up processes.
Attendees had a lot of questions, and while we didn’t have time to address them all during the Q&A segment of the webinar, we have, as promised, presented them here, along with Marianne’s responses, for your reading pleasure. Marianne remains happy to continue this dialogue with anyone interested; feel free to reach out to her directly or through your Weichert contact.
Deductible moves and deductible expenses are two entirely different subjects. A deductible move is one that meets all the criteria (is closely related to the start of work, meets the distance test and meets the time test). HHG and final move expenses (except meals and mileage > IRS limit) are not reportable if paid to a third party and are only reportable (not taxable) if they are reimbursed to the employee. Deductible expenses are taxable expenses that have been paid to or on behalf of your employee and are the types of expenses that are deductible on schedule A of your 1040. Those deductible expenses should be grossed up for FICA only, otherwise your employees will experience a tax gross up windfall.
We do not withhold taxes from payments, we only provide gross up calculations to payroll. Once payroll assigns a check date, normally the taxes are due the next day.
Moving to an annual reporting schedule is the decision of your company, the risk would be whatever you make it or not. From my perspective, however, the risk is no different than other frequencies. Our clients have always been compliant and have never failed or been questioned under audit.
The most generous methodology is a supplemental gross-up during the year with a year-end marginal adjustment based upon expected W2 earnings from your company.
Timing the first gross-up after bonus payouts – your employees will pay more FICA on their own thus reducing the amount of FICA wages you’d need to provide gross up on.
Less frequent processing of gross ups – processing gross-up later in the year and less frequently allows your employees to pay more if not all of the FICA (Social Security) via their normal paycheck, thus reducing or potentially eliminating your cost of having to provide gross up on the first $127,200 of earnings at the rate of 6.2% for gross up and 6.2% employer match.
Gross-up deductible items for FICA only – Deductible type of expenses such as mortgage interest should be grossed up for FICA only because it is deductible on the 1040 via Schedule A Itemized Deductions.
Pay more expenses through payroll, withhold taxes – it is best practice to pay items such as miscellaneous expense allowance, lump sum, COLA and homesale bonus through payroll with taxes withheld.
Change your federal gross up methodology – an in depth analysis would be required to determine how your current program is working for you and if it is meeting your needs and employees expectations. There are many ways to provide gross-up, depending upon how rich of a gross up you’d like to provide would determine how gross up should be calculated.
That’s the million dollar question, right? It goes to what your tolerance level is. As a company, perhaps you just never thought of it. You’ve just continued doing it that way year over year. Maybe you’ve been with a provider so long and that’s just the way that it’s been. Or maybe you switched providers and you just stayed status quo.
What I can tell you is if you’re in a situation like that where you have been with a provider for a long time or you just switched over and you’re continuing your program as is I highly recommend taking a look into the details because there is money to be saved there. And it’s not hard to grab that money. So why wouldn’t everybody do it? I don’t know. It all goes to what you’re comfortable with really.
One way you would know for sure is if your phone is ringing off the hook. If you’re getting a lot a lot of complaints, a lot of phone calls from employees saying things like, “I went into my CPA and he did my taxes or she did my taxes and I owe $5,000 for gross up.” If you’re getting those types of calls, you definitely need to take a look at your program to see what you’re offering.
Unfortunately, there’s no silver bullet solutions. It really comes down to having us take a look at your entire program end to end. It requires an in depth, deep dive analysis into the very guts of your program and what you’re providing for gross-up currently. And, we need to take into consideration the types of employees you are grossing-up, the mean average of income that these people are earning and the tax brackets they fall into.
We also need to know your goal. Are you looking to get people as close to their effective tax rate as possible? Are you looking to save as much money as possible? Do you want to land somewhere in the middle? Once we know these things and have some insight to your program, we can show you how much you could save by doing things a different way. We take your information and apply some theory, logic and analytics to it and can illustrate to you different ways of saving and can hopefully fall within your comfort zone of what you’d like to provide or not like to provide. You just have to give us a call to get it started.
No, you do not.