What Is a Gross-Up?
A gross-up is when an employer pays an employee's taxes on a payment — so the employee receives the intended net amount after withholding. Instead of handing an employee a $5,000 bonus that nets about $3,518 after a 29.65% combined withholding rate, the employer grosses it up to $7,107 so the employee takes home the full $5,000 net (the exact math is below).
Gross-ups are common for relocation reimbursements, signing bonuses, equity awards, and certain executive compensation arrangements where the employer wants the recipient to receive a specific dollar amount.
The Basic Formula
For a simplified gross-up using supplemental withholding rates:
Gross Pay = Desired Net ÷ (1 − Total Tax Rate)
Where total tax rate = federal supplemental rate (22%) + Social Security (6.2%) + Medicare (1.45%) + state rate.
Example: Employee wants $5,000 net, no state tax, combined rate = 29.65%.
Gross Pay = $5,000 ÷ (1 − 0.2965) = $5,000 ÷ 0.7035 = $7,107.32
The Complication: High-Income Employees
The simple formula breaks down for high-income employees because:
- Social Security tax stops at the annual wage base ($176,100 in 2025; $184,500 in 2026). If the employee is already above that threshold, you're not withholding SS on the bonus at all.
- The Additional Medicare Tax of 0.9% kicks in on wages above $200,000 in the calendar year, whatever the employee's filing status (the $250,000 figure for joint returns only matters on Form 8959).
- If the employee is in the 37% marginal bracket, using the 22% supplemental rate still creates underwithholding that the employee owes at filing.
For executives, the gross-up should use the actual marginal rates and consider year-to-date wages to determine which taxes still apply.
Tax-on-Tax: Stacked Gross-Ups
Here's the catch that surprises payroll: when you gross up a payment, the gross-up amount itself is taxable. So the grossed-up amount generates additional taxes, which would need to be grossed up too. The formula above already solves that stacking for flat rates, so its result is exact. Where rates change inside the payment (a wage base reached part-way, a bracket crossed), solve it iteratively or use the Gross-Up Calculator, which handles the stacking automatically.
State Tax Considerations
State supplemental withholding rates vary significantly. California withholds a flat 10.23% on bonuses and stock options and 6.6% on other supplemental wages (the split is by payment type, not a dollar threshold). New York uses 11.7%. No-income-tax states (Texas, Florida, etc.) simplify the calculation. Always factor in the applicable state rate for your gross-up calculation.
W-2 Reporting
The full grossed-up amount — including the employer-paid tax portion — is wages and must be reported in Box 1 of the W-2. The employer's payment of the employee's taxes doesn't reduce the employee's taxable income. The gross-up creates a larger tax liability for the employee even though the employer paid it, because the payment of taxes is itself income.