Summary Definition: A calculation for identifying the necessary pre-tax amount that guarantees a specified post-tax amount.
A gross-up for taxes is a calculation used to find the amount of gross pay an employer should disburse to guarantee an employee receives a defined amount of net pay.
Gross-up amounts usually apply to one-off payments, such as bonuses or severance payments. Although the process can also be used for regular wages, it’s much less common.
Within most payroll processes, gross-up calculations often use similar steps:
The formula for a gross-up calculation is:
Gross Pay = Net Pay / (1 - Total Tax Rate) |
For example, if a company pays their employee a bonus of $1,000, the gross-up calculation would look like this:
Thus, for the employee to receive the full stated value of the $1,000 bonus, the company must pay them $1,643.39 to cover the corresponding taxes.
The primary benefit a gross-up has (for both employers and employees) is the satisfaction of knowing each recipient gets the full stated value of the extra income. If someone is told they'll receive a $500 bonus, they'll receive all $500, and not have to worry about calculating taxes or sacrificing portions of the bonus to cover those taxes.
On the other hand, this means the employer has to invest extra time and finances to complete those tasks on the recipient's behalf. Here are some risks inherent in the process:
Moreover, some see gross-ups as somewhat unscrupulous when used to discreetly raise the pay of highly compensated executives. In financial reports where only net pay is reported, it wouldn't be apparent that the executive took home the full amount.
Payroll doesn’t have to be complicated, but it does have to be right. Stay compliant, collect employee data, and streamline tax filing – all while putting time back in your day with our automated payroll software. With the assurance of an error-free workflow, you can get back to what matters most – your people. Learn how our modern solutions get you out of the tactical and back to focusing on the bigger picture.