What Does Gross-Up Mean?

Gross-up is additional money an employer pays an employee to offset any additional income taxes (Social Security, Medicare, etc.) an employee would owe the IRS when that employee receives a company-provided cash benefit, such as relocation expenses.

Gross-up is optional and is usually used for one-time payments. However, there are times when it is used to meet a specific annual net salary. When this happens, gross-up merely restates the salary as net instead of gross salary (before tax withholding).

What Is an Example of Gross-Up?

To help illustrate gross-up, here is a common example:

The Jones Company relocates Cecil to Texas and pays for his moving expenses, which totaled $3,000. Cecil receives the relocation reimbursement on his paycheck, but when he looks at his paystub, he notices that the amount paid to him equaled $4,000. This is because The Jones Company didn’t only pay for his moving expenses, but also for the withholding tax Cecil would normally owe on the $3,000 benefit he received. Now Cecil doesn’t owe any income taxes on his reimbursement.

Fast, easy, and accurate payroll with BambooHR®.

Pay your U.S.-based employees on time, every time.

Learn More

When Might an Employer Offer a Gross-Up to Employees?

Examples of when an employer might offer a gross-up payment to employees:

What Are the Pros and Cons of Grossing Up Salary?

There are some definite pros and cons of grossing up salary or other payments, both for employers and employees.

For the employer



For the employee



How Does a Gross-Up Work?

Gross-up pay works by dividing the employee’s wages by the net percentage of taxes that would be due. The total equals the gross-up pay amount.

All regulations must be followed, including the “Executive Compensation and Related-Party Disclosure,” of which one of the main requirements is to disclose a named employee’s tax gross-ups that exceed $10,000 in one year on company financial statements.

Additionally, for some gross-up compensation contracts, an employer may want to include a gross-up clause.

How Do You Calculate Gross-Up?

To calculate $500 bonus grossed-up, follow these four steps:

  1. Add together all applicable tax rates, which are Federal Supplemental tax rate = 22%, Social Security tax rate = 6.2%, Medicare = 1.45%, and State Supplemental tax = 0%, so 29.65%.
  2. Convert the tax rate into a decimal, so 29.65% = 0.2965.
  3. Subtract the decimal tax rate from 1 (1 - 0.2965 = 0.7035).
  4. Divide the net pay by 0.7035 (500 / 0.7035 = 710.73).

Therefore, the total grossed-up bonus pay should equal $710.73 if it’s going to cover taxes.