Keeping service fees in the non-taxable column
Traditional RMC revenue models needlessly increase gross-up costs for employers.
The most sweeping US tax legislation since the Tax Reform Act of 1986 was signed into law on December 22, 2017. The Tax Cuts & Jobs Act ushered in many changes to our tax code, some of which impacted the mobility industry directly. The most significant change for mobility was the elimination of the exclusion from taxable income of household goods (HHG) shipment and final move expense reimbursements or payments.
Recognizing tax changes that affect your bottom line
The elimination of the exclusion is significant in that these expenses are now subject to income taxation and, as such, increase the tax assistance (gross-up) costs for employers. A side effect of this change is the spotlight it has put on the commission or rebate portion of HHG invoicing.
Traditionally, relocation management companies (RMCs) have earned a “commission” when booking HHG shipments with a carrier on behalf of their clients. These commissions are paid from the carrier to the RMC as rebates after the fact, with the commission amount embedded in the gross amount of the invoice. The commission is part of the overall fee structure the client pays to the RMC for outsourcing the mobility function.
Fees paid to RMCs for services are not considered taxable income to the employee but are treated as business expenses. As a business expense, fees are not subject to gross-up, saving the employer additional tax assistance expenses. Unfortunately, with HHG expenses now taxable, the portion of the invoice which represents the fee is also now taxable, unnecessarily increasing gross-up expenses for the employer.
In the comparison table below, we can see that including the RMC commission amount in the gross HHG charge increases the overall expense to the employer due to the need to gross-up the entire amount.
Properly classifying commissions as a “fee for services rendered” and splitting those fees out separately on partner invoicing saves on gross-up expense. Service fees are business expenses and not taxable income to the employee.
We recommend that you understand the commissions earned by your RMC – Commissions are simply another way employers compensate RMCs for the work that they do. These amounts do not come out of supplier profits but are simply added on.
Many taxable reimbursements have embedded commissions:
- HHG transportation charges
- Auto shipment
- Third-party HHG services
- Temporary lodging
- Spousal counseling
Work with your RMC to properly classify commissions and rebates as service fees and reduce the gross-up expense.
Consider switching from a commission-based compensation model to a purely fee-based model in your mobility program. This will save on gross-up
expenses and allow greater visibility and confidence in the accuracy of amounts paid to your RMC for services.
Properly classifying the commission amount as a “fee for services rendered” and separating it out on the carrier’s invoice saves the client the gross-up expense component. A service fee is a business expense and not taxable income to the employee.*
*The information contained in this paper does not constitute tax or legal advice nor a client relationship and should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisers. The application and impact of laws can vary widely based on the specific facts involved. Before making any decision or taking any action, you should consult with your tax professional regarding your specific circumstances. The author’s use of Worldwide ERC®’s material is not, in any way, an endorsement by Worldwide ERC® of the article or the opinions expressed in the article.