Certified Relocation Professional (CRP) Practice Exam

What will happen to gross up payments regarding income tax liability?

1. They will incur no liability for the employee

2. They may create some tax liability for the corporation

3. They are usually exempt from all liability regulations

4. They often create an additional tax liability for employees

The correct answer is: They often create an additional tax liability for employees

The choice indicating that gross-up payments often create an additional tax liability for employees is correct because when an employer provides gross-up payments to offset the tax implications of specific financial benefits or relocation expenses, these payments can indeed lead to a higher taxable income for the employee. When gross-up payments are issued, they are intended to cover not only the relocation costs but also the taxes associated with those payments. However, any additional payment made to the employee increases their overall income, thus potentially placing them in a higher tax bracket or increasing their overall tax liability. Employees must consider their total earnings and tax implications of any gross-up they receive; therefore, this can result in higher personal tax obligations than anticipated. As for the other choices, they suggest various absolutes that do not typically align with the complexity of taxation systems. For example, stating that gross-up payments incur no liability for the employee does not take into account the increased taxable income. Similarly, while gross-up payments may sometimes create a liability for the corporation, stating they may "create some tax liability" lacks the specificity and commonality of the issue as the taxable result is primarily directed at the employee. The assertion that they are usually exempt from all liability regulations overlooks the nuances of tax law, which applies regardless