Gross-Up

What is a gross-up?

A gross-up is an extra payment made to cover the income taxes owed on a specific payment so the recipient receives a targeted net amount. Employers commonly use gross-ups for one-time cash benefits such as bonuses, severance, relocation reimbursements, and certain executive payments.

How it works

• Employer determines the net amount the recipient should receive (take-home pay).
• Employer calculates the gross payment required so that, after taxes are withheld, the recipient retains the intended net amount.
• The employer pays the larger grossed-up amount and withholds taxes from that payment.

Gross-ups are typically calculated using an estimate of the recipient’s tax rate; if the estimate is imperfect, the recipient may still face additional tax liability at filing time.

Gross-up formula and example

Formula:
Gross pay = Net pay / (1 − Tax rate)

Example:
– Desired net pay: $100,000
– Estimated tax rate: 20% (0.20)
– Gross pay required = $100,000 / (1 − 0.20) = $100,000 / 0.80 = $125,000

After 20% taxes on $125,000, the recipient’s take-home equals $100,000.

When employers use gross-ups

• Relocation reimbursements
• Signing or performance bonuses
• Severance packages
• Special one-time payments (e.g., tax-equalization for expatriates)
• Sometimes applied to executive compensation to increase net benefit

Practical considerations

• Calculations usually use estimated tax rates (federal, state, payroll taxes), which may not match actual liability.
• Payroll taxes, benefits, and other withholdings should be considered in the estimate.
• Gross-ups increase employer cost and must be budgeted accordingly.
• For expatriates, gross-ups can be used to tax-equalize foreign assignments.

Controversy

Gross-ups draw scrutiny when used in executive compensation because they can increase pay without clearly appearing in reported net-pay figures, potentially obscuring the true cost to shareholders. High-profile corporate severance and relocation gross-ups have triggered public and regulatory criticism, particularly when awarded amid company underperformance or layoffs.

Related terms (brief)

• Grossed over: A colloquial use meaning total revenue earned before costs or taxes (e.g., a film grossed over $200 million).
• Adjusted Gross Income (AGI): Tax term meaning gross income minus allowable adjustments, used to determine taxable income.
• Gross Profit Margin: Company revenue minus cost of goods sold (COGS), expressed as a ratio, indicating operational efficiency.

Bottom line

A gross-up ensures a recipient receives a specified net payment by increasing the gross amount to cover expected taxes. It is common for one-time employer payments but can be controversial—especially in executive pay—because it increases compensation costs and can obscure reporting of total compensation. Use precise tax estimates and clear policies to avoid unexpected liabilities and reputational risk.