Gross Up

A gross-up is an additional amount added to a payment to cover the income taxes that the employee will owe on the payment. It generally happens when employees receives cash benefits like cash bonuses, severance plans, and relocation expenses. Another common example is when a company pays relocation expenses and a gross to an executive to offset the expected income taxes on their salary and payment. 

What is a Tax Gross Up?

A tax gross-up can be defined as a calculation that starts with the desired net payment of the employee. Further, to determine the gross payment, the employer then calculates the gross payment:

• Social security tax
• Federal income tax
• State and local taxes, if applicable
• Medicare tax
• Other tax deduction, if applicable

Types of Compensation that Grossed Up

Gross up generally applies to one-time payments. It includes:

• Bonuses
• Relocation expenses
• Severance payments

How a Gross-Up Works?

Usually, in most payroll processes, the gross-up calculation uses the same steps:

• Selection of a specific level of net pay.
• On the chosen net pay, the employer determines all the taxes that his/her employee needs to pay.
• To offset the determined taxes, the gross-up amount is calculated and added to the selected net amount.
• Further, via the normal payroll process, the employee gets the total amount. 

How to Calculate Gross Up?

The formula to calculate gross-up is:

Gross Pay = Net Pay / (1 - Total Tax Rate)

For instance, if a company pays a $1000 bonus to its employees, it will first calculate the applicable tax rate:

• Total tax rate = Federal income tax + State income tax + FICA taxes
• 39.15% (or 0.3915) = 22.00% + 7.65% + 9.50%

Now, to calculate the gross-up amount, it would subtract 1 from that total tax rate. After that, divide $1000 by the difference.

• Gross-up amount = $1000 ÷ (1 - 0.3915)
• $1,643.39 = $1000 ÷ 0.6085

Therefore, the company will pay $1643.39 to the employee instead of a $1000 bonus to cover the corresponding taxes.