What is a gross-up?

A gross-up is when a company pays an employee an additional amount to cover the taxes on a payment, so the employee receives the full intended net amount. Instead of the employee paying tax out of a bonus, the employer calculates and pays the tax on their behalf.

Gross-up formula

The formula to calculate the required gross payment from a desired net amount:

Gross = Net ÷ (1 − Combined Tax Rate)

Example: you want an employee to net $5,000 and the combined tax rate (federal + state + FICA) is 30%. Gross = $5,000 ÷ (1 − 0.30) = $5,000 ÷ 0.70 = $7,142.86. The company pays $7,142.86; the employee nets $5,000 after $2,142.86 in taxes.

Supplemental withholding

For supplemental wages (bonuses, awards, relocation payments), the IRS allows a flat withholding rate of 22% (as of 2024) for amounts up to $1 million, rather than calculating from the employee's W-4 rate. This simplifies gross-up calculations for one-time payments.

Common gross-up use cases

Relocation reimbursements: employers gross up moving expense reimbursements so employees aren't penalized for relocating.
Executive compensation: some executive contracts include tax gross-ups on perquisites (perks) or severance payments.
Prize and award payments: companies gross up awards so recipients receive the full stated prize value.
Gift cards and non-cash benefits: taxable fringe benefits may be grossed up so the employee's net benefit equals the stated value.