What is Gross-Up?
Gross-up refers to additional money paid by an employer to offset any income taxes that an employee may owe on a company-provided cash benefit, such as relocation expenses. The benefit can be a one-time payment or supplemental income that is included in the employee’s annual net salary. Gross-up reduces the employee’s tax liability and ensures that they receive the full entitlement of their compensation package.
A common example of a gross-up is when an employer pays for an employee’s moving expenses, which totaled $3,000. To avoid the employee paying tax on the $3,000 benefit, the employer adds a gross-up amount to the employee’s paycheck. This amount covers the withholding tax that the employee would typically owe the IRS. In this scenario, the employee doesn’t owe any income taxes on relocation expenses.
Employers provide gross-up payments for multiple reasons, including attracting top talent, meeting federal tax compliance, and reducing the burden of tax administration. However, there are both advantages and disadvantages to grossing up your payroll:
Pros for Employers:
- Attract top talent: Gross-up payments can be a useful tool for offering competitive compensation packages, particularly in industries where talent is scarce.
- Meet compliance requirements: In some situations, companies may be required to provide gross-up payments. For example, companies may use this payment method to meet compliance with local tax laws or union agreements.
- Streamline tax administration: Creating accurate tax calculations can be challenging, particularly when dealing with multiple payment frequencies or allowances for an equity award. Grossing up payments can help reduce administrative burdens.
Pros for Employees:
- Increased take-home pay: Gross-up payments make it possible for employees to receive their full paycheck without worrying about additional tax obligations.
- Competitive compensation package: Gross-up payments help attract and retain top talent by providing a comprehensive compensation package.
- Reduce financial risk: Providing gross-up payments can help employees avoid falling beneath a specific tax threshold and facing hefty penalties or higher tax liability.
How do I calculate gross-up payments?
To calculate gross-up payments, employers can divide the employee’s wages by the net percentage of taxes due, with the total amount equaling the gross-up payment. Employers must follow specific regulation frameworks to avoid non-compliance penalties.