Wow – $$$ from Relocation Package, Bonus Money!
When I signed the contract for my first job, it came with a 10K relocation package and 40K sign on bonus paid in 2 installments. As a recent medical school graduate and resident, I felt very rich – that is until I found out about the taxes that I have to set aside for these monies!
Be aware that a lump sum relocation package will be fully taxed as earnings. So the 10K relocation package may only be worth 6K and may not be enough to cover your moving and relocation expense. Worse still, if you do not account for this, you might have a tax bill shock when you receive your tax bills later! A few of my co-workers had to pay penalties to Uncle Sam and ended up with a payment plan because they did not save up enough to pay up come tax time.
How to avoid this?
For the relocation package, depending on how your contract is worded, there are 2 easy ways to get around this.
Large companies can sometimes contract and pay the moving company instead. If your hospital pays for your moving expenses directly to the household moving company or car movers or the moving laborers, it will not be taxed as it is considered reimbursement for expenses. I can tell you that most medical clinics and hospitals will not be open to this option as it will be too difficult for them to contract with so many smaller companies around the country. Furthermore, it will greatly limit your options when picking a moving company.
The second option, which is more tenable, will be to ask for your company to include your moving expense as an expense report, which you will need to submit all your receipts for reimbursement. You will still have to list these expenses in your W2 form (Box 12P), but will not be taxed as income.
What if I don’t need that much to relocate? – All I have is my backpack…
Since I sold most of my (second hand/craigslist type) furniture before moving, my moving expenses only came to around 5K. As such, I requested that the relocation contract be re-written to include paid trip out to find a rental (didn’t end up using this, too busy in residency!) and reimbursement for temporary living arrangements for the first month (I stayed in a very nice VRBO-type cottage for the first week in my new city), and car rental while in my ‘temporary living arrangements’.
The only downside to this move is that you will need to pay for all the expenses first and be reimbursed later, so just be sure to save up some money or use a zero-percent interest rate credit card to put all your expenses on!
Big Bonus Coming My Way…
In terms of my sign-on bonus, I negotiated a revision to the contract, where half of my sign on bonus was designated for legal fees and immigration fees for my self-sponsored green card – another article coming soon on self-sponsored green card for physicians along with pros and cons.
I wished I had known this earlier, but I could have opened a solo 401K as well (more information on that in another article), as I was given a 1099 form for the bonus money (Our sign on bonus was paid by the hospital, not our immediate employees, the hospitalist group).
Give Some Away…
Here is another: I wished I knew this when… situation. I could have donated part of the sign on bonus outright or opened a donor advised fund – which would have given me an immediate tax deduction, but would give me time to decide where to channel my money to. More on this in another article!
Regardless of what option you may think of to reduce your tax liability, just remember to set aside a portion of it for taxes.
Before signing on the dotted line, consider hiring a contract review company. One that I think highly of is, Contract Diagnostics . They review all types of employment contracts but specializes in physician contracts. They offer numerous packages (starting at $200 for a basic review – up to more detailed legal, a benefit, and a compensation review. They also offer direct negotiation with your employers. They offer an all-in-one human resources, legal team that will help you negotiate the best compensation possible.
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