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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:
1.
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.
2.
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.
3.
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.
4.
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. |
