Certified Relocation Professional (CRP) Practice Exam

What is true about gross up payments?

1. They are excluded from income

2. They produce no additional tax liability when added to income

3. They must be included in income and create an additional tax liability

4. They are mandated by the IRS without exception

The correct answer is: They must be included in income and create an additional tax liability

Gross-up payments are typically made to ensure that a relocating employee receives a net payment that accounts for the tax implications of certain compensations. When an employer provides a gross-up payment, they essentially calculate an additional amount to cover the additional tax burden the employee would face due to receiving a specific payment. The correct assertion is that gross-up payments must be included in the employee's income and create an additional tax liability. This is because the gross-up amount is considered taxable income. When employees receive gross-up payments, these amounts increase their total taxable income, which ultimately may lead to a higher overall tax liability for the employee during tax filing. The purpose of such payments is to net the employee's effective compensation after taxes, but they still do contribute to the taxable income reported on the W-2, which reflects all earnings including any gross-up compensation. The context surrounding other options is essential: while certain payments or forms of compensation may have specific tax treatments, gross-up payments consistently fall into the category of taxable income associated with relocation and similar benefits, contrary to being excluded from income or without creating additional tax liability. Additionally, gross-up payments are not mandated by the IRS universally but are rather an option employers may choose to offer, making the assertion about a mandate