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 giving an employee a $5,000 bonus that nets $3,200 after taxes, the employer grosses up to $7,353 so the employee takes home $5,000 net.
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 phases out at $168,600 (2024). 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 above $200,000 (for single filers).
- 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. In theory this cascades infinitely, but in practice the first-order gross-up gets you close enough. For precise results, use the iterative formula or the Gross-Up Calculator which handles the stacking automatically.
State Tax Considerations
State supplemental withholding rates vary significantly. California uses 10.23% for supplemental wages over $1 million and 6.6% below. 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.