Is a Relocation Bonus Taxable? What You Need to Know

Companies often offer relocation bonuses to help employees cover moving costs for a new job. While these payments can be useful, they also come with tax implications that many people don’t anticipate. Without proper planning, taxes can significantly reduce the amount received.

Tax Status of Relocation Bonuses

Relocation bonuses are considered taxable income by the IRS and are subject to federal, state, and local taxes. Before the Tax Cuts and Jobs Act (TCJA) of 2017, reimbursements for moving expenses were tax-free, but now all relocation bonuses are treated as wages. This means they are subject to income tax, Social Security, and Medicare deductions.

Since these payments are classified as supplemental income, they are taxed differently than base salary. Employers can withhold federal taxes using either the percentage method or the aggregate method. The percentage method applies a flat 22% federal withholding rate for amounts up to $1 million, while anything above that is taxed at 37%. Some employers use the aggregate method, which combines the bonus with a regular paycheck and withholds taxes based on the total amount, potentially resulting in a higher withholding rate.

State and local taxes further impact the final amount received. States like Texas and Florida, which do not impose state income tax, only require federal withholding. In contrast, high-tax states such as California and New York can significantly reduce the net amount due to their progressive tax systems. Additionally, certain cities impose local income taxes, further affecting take-home pay.

Federal Withholding for Relocation Bonuses

Employers must withhold federal income tax on relocation bonuses. The percentage method applies a flat 22% withholding rate for bonuses under $1 million, while amounts exceeding this threshold are taxed at 37%. This simplifies withholding but may not match your actual tax liability when filing your return.

The aggregate method combines the bonus with your regular paycheck and applies standard payroll withholding tables. This often results in a higher withholding rate, especially if the combined amount pushes you into a higher tax bracket. While excess withholding may lead to a refund when filing taxes, it can reduce the immediate net amount received.

Employers also withhold Social Security and Medicare taxes. In 2024, the Social Security tax rate is 6.2% on wages up to $168,600, while Medicare tax is 1.45% on all wages. An additional 0.9% Medicare surtax applies to earnings above $200,000 for single filers and $250,000 for married couples filing jointly. These deductions further reduce the final amount received.

Reporting on Your W-2

Relocation bonuses appear on your W-2 form as part of total taxable wages. Employers must provide this form by January 31 following the tax year in which the payment was made. The bonus is included in Box 1 (Wages, tips, other compensation) along with regular earnings and is also reflected in Boxes 3 and 5 for Social Security and Medicare wages.

If the bonus was paid separately from a regular paycheck, it may have been taxed at a higher withholding rate. However, the W-2 consolidates all taxable earnings into a single figure. Even if the bonus had a higher initial withholding, the final tax liability is determined when filing a return. If too much was withheld, a refund may be issued; if too little, additional taxes may be owed.

Some employers offer a gross-up, covering taxes on the employee’s behalf to ensure a specific net amount is received. In these cases, the W-2 will still reflect the full pre-tax value of the bonus as taxable income, which can affect tax credits or deductions that phase out at higher income levels.

State and Local Tax Factors

State and local tax treatment of relocation bonuses varies widely. Some states have progressive income tax rates, meaning a large one-time payment could push you into a higher bracket. For example, California’s tax rates range from 1% to 13.3%, so a sizable bonus could increase your state tax burden. Pennsylvania, by contrast, has a flat income tax rate of 3.07%, ensuring the bonus is taxed at the same percentage regardless of total earnings.

Timing also plays a role. If you relocate mid-year, you may owe taxes in both your former and new state, depending on residency rules. New York, for example, applies a 183-day rule, meaning if you spend more than 183 days in the state, you may be considered a resident for tax purposes, even if your primary residence is elsewhere. Some states have reciprocity agreements that prevent double taxation when working in one state but living in another.

International Relocation Tax Issues

Relocating to another country for work introduces additional tax complexities. The U.S. taxes citizens and resident aliens on worldwide income, meaning relocation bonuses remain subject to IRS rules even if earned abroad. However, tax treaties and foreign tax credits can help reduce double taxation.

The Foreign Earned Income Exclusion (FEIE) allows qualifying individuals to exclude up to $126,500 of foreign-earned income in 2024, but relocation bonuses may not qualify if paid before establishing residency abroad. The Foreign Tax Credit (FTC) provides a dollar-for-dollar credit for taxes paid to a foreign government, which can offset U.S. tax liability. Some countries also impose exit taxes or require social security contributions, further affecting the financial impact of an international move.