Relocation Considerations
Consider this common scenario faced by many employees:
Your supervisor calls you into her office on a Friday afternoon
and asks you to transfer to the New Jersey office. She says the
new job includes a $10,000 increase in salary, and loads of potential
"in the future." She gives you the weekend to think about it. What
do you say? No doubt, a million questions start popping into your
head. You've heard New Jersey is expensive to live in. Is $10,000
enough? How much are the houses? What will your property taxes be?
What about income taxes? What about your wife's job? Will the kids
like it there? Will you like the new job? What is the impact on
your career if you refuse the job transfer?
According to psychologists relocation is among the
most stressful events that can happen to a person, or a family.
Changing jobs, which often occurs when relocating, is also high
on the stress index. For many people the decision to relocate involves
a complex set of variables of a financial, personal and emotional
nature. These factors contribute to the stress in varying degrees,
depending upon the individuals involved. The questions above can
be broken down into two broad categories: objective and subjective.
The emotional and personal aspects of relocation are subjective
and thus difficult to model. Fortunately this is not true of the
financial ramifications, which are more objective and easier to
quantify. This article will discuss many of the financial variables
which should be considered by employers and employees before a relocation
decision is made.
When deciding on compensation packages for transferred
employees, employers often do not consider that each employee is
an individual, with unique financial considerations. No two families
are alike and a relocation analysis must reflect differences in
income tax brackets, housing size, property taxes, spousal income,
dependents, etc. Using generic cost of living indices does not produce
an accurate calculation of the financial impact of relocating. Using
only a customized analysis will produce a true apples to apples
comparison. The battle cry of the relocating employee is "AT LEAST
KEEP ME WHOLE." In other words, the employee should not have to
relocate, absorb the emotional stress, and lose money as well. The
after tax cash flow should be at least zero.
An accurate, individualized, analysis has other benefits
for the employer. These are:
- If the employee is presently living in a high cost of living
area, and the employee is moving out of this area to a lower
cost of living area the analysis will most likely show a positive
cash flow, which will encourage the employee to relocate.
- Employers in low cost areas will find the analysis useful
in encouraging employees to transfer into the area from higher
cost of living areas, since the analysis will probably show
a positive cash flow. Lower salaries can be justified, and demonstrated
to the employee, thus saving expenses.
- Employers in high cost of living areas can use the analysis
for employees moving into the area, from lower cost areas, when
cost of living concerns are negatively impacting the relocation
decision, and there is a resistance to relocation. An analysis
may convince the reluctant employee that the after tax cash
flow isn't as bad as they thought. Often, reluctant employees
must relocate to high cost areas for career advancement purposes,
but want just compensation, calculated in gross salary dollars.
A confidential analysis will show an employer how much the employee
should be equitably paid, to compensate for cost of living differences.
- Employers can use the analysis to make sure employees are
comparing apples to apples in their relocation decision. Many
employees attempt to upgrade their standard of living, usually
through unfair housing and community comparisons, at the employer's
expense.
Most employees and employers perform a very superficial
analysis of the financial impact of relocating. This is understandable
since it is very complicated from a tax and financial planning point
of view. The typical analysis involves a comparison of housing in
the new area with the increased salary offer, if any. Or the salary
is set based upon a comparison to other employees in similar positions.
The effect upon a family's cash flow in the first year after the
move is much more complex than this simple analysis. As a result
costly errors can be made which affect not only the family's financial
health but also their happiness as well. An employee who feels unfairly
treated is not as productive, and may seek other employment. If
the employee is worth relocating he/she is worth fair compensation.
After all, if suitable talent were available locally the relocation
would be unnecessary. Relocation mistakes result in further relocation
and additional stress for both the family and for employers. Performing
a proper analysis before a relocation offer is accepted reduces
stress by decreasing uncertainty. This allows the employee to evaluate
the relocation offer more accurately, and provides benefits to the
employer by increasing employee happiness and retention.
Before describing the financial changes caused by
relocation in more depth it should be noted that the analysis should
be performed, not just for the relocating employee, but for the
entire family. Often relocation can cause major financial changes
for spouses, companions, fiancés, children, dependent parents, and
others. Also, all changes should include the federal, state and
local tax impact, where appropriate, at the individual's projected
marginal rates of tax.
The analysis should compare the old salary with the
change in family salary, wages, and business income. It should not
include changes that would have occurred anyway had the family not
relocated, since this would obscure the real cost, and would be
unfair to the employer. The change should be net of federal, state,
and local (city) income taxes, as well as social security taxes.
A common problem experienced by many families, sometimes called
the "trailing spouse" problem, occurs when the spouse of a relocated
employee experiences great difficulty finding employment in the
new area. The analysis should be able to analyze the projected decrease
in the spouse's income for the first year after the move.
Another area often neglected by relocating individuals
is the change in wealth caused by changes in automobile expenses.
This can be caused by changes in commuting distances, automobile
insurance rates, personal mileage (for example to return home to
see friends and relatives, or to access qualified medical care),
tolls and parking, use of a company car, or an increase or decrease
in amounts paid by employers for business use of your personal car.
Some of these changes have tax effects and some do not. Most people
underestimate how expensive it is to operate an automobile, probably
because the major portion of the expense is depreciation (a non-cash
item), and because the expenses are paid gradually.
Changes in job benefits are often a factor if the
employee is changing employers, and occasionally when transferring
within the firm. Items to consider here include changes in medical
insurance, life insurance, plans, and other perquisites such as
day care.
Changes in state and local income taxes should be
included, net of federal tax effects. The family's income should
be recalculated using the tax laws of the new state, and city (if
there are city income taxes). Consideration must be given for employees
choosing to live in one state and work in another, such as the millions
of people who live in New Jersey and work in New York. In such cases
they will pay non-resident income taxes in the state they are working
in. Most states have reciprocity agreements to prevent double taxation,
which permit residents to deduct taxes paid to other states.
Changes in housing costs are, of course, a major
item. It is important to make valid, meaningful, comparisons when
comparing housing costs between areas. For example, comparisons
should be made which compare the same size houses (square footage)
. Also included should be the real estate taxes, and rent, if the
individual is not buying. Of course, the federal income tax impact
of these changes should be included. Another factor to be considered
is the change in interest rates caused by exchanging the old mortgage
for a new one. If the employee is buying a cheaper house in the
new area he/she may incur federal and state capital gains taxes.
This tax should not be included in the analysis because it occurs
only once, and should not be part of the calculation of ongoing
salary. Of course, the employee should be reimbursed for this tax,
since the relocation caused the imposition of the tax. Likewise,
if the relocation causes the family to have to sell investment real
estate, a partnership, or stock in a closely held business then
there will be capital gains or losses incurred because of the realization
of gains or losses on the sale of these assets. Distance or increased
job responsibilities may require that these investments be sold.
If the family wishes to compare owning vs. renting, or renting vs.
owning, the analysis should be able to do this, although it may
not be a fair comparison for negotiation purposes.
Finally, the analysis should not include the cost
of moving household belongings, travel expenses including meals
and lodging for the family, temporary living expenses in the new
area, pre-move house hunting trips, real estate agent's fees, legal
fees to buy and sell houses, points to payoff an old mortgage or
secure a new mortgage, and redecorating expenses. These expenses
are one-time expenses which will not repeat in future years, and
therefore should not be included when calculating salary. Of course,
the employee should be reimbursed for these expenses, but if the
purpose of the analysis is to show gross salary equivalents then
moving expenses should be excluded, since they are not recurring.
Most employers will pay some or all of these expenses, but it is
wise to be specific about what will be reimbursed. The reimbursement
of deductible expenses is not taxable, while the reimbursement of
non-deductible expenses is completely taxable. Therefore the employee
must be reimbursed for federal, state, local, and social security
tax impact on the portion of the reimbursement which is non-deductible.
This is called a 'tax gross-up' payment. Since the tax gross-up
payment is also taxable the calculation becomes a little complex.
Many employers do not calculate this amount correctly. They usually
do not reimburse for the state, local and social security tax impact,
and they assume all taxpayers are in the same tax bracket.
This article has highlighted the important financial
variables which should be considered when making salary offers to
employees who are relocating. An analysis based upon a superficial
comparison of cost of living indices does little to reduce the very
significant stress associated with relocating and changing jobs.
The analysis must be individualized to each family, since families
have different financial profiles such as different incomes, house
sizes, etc. Relocation can be a significant financial planning tool
when relocating to a lower cost of living area, which can increase
cash flow and provide significant lifetime benefits which will help
employees achieve their financial goals. A thorough analysis will
not only reduce pre-move stress by eliminating financial uncertainty
but will increase post-move happiness for all involved.
