The gross up is a simple way businesses cover income taxes for additional amounts of payments made to employees. The best example of grossing up a paycheck is when the company pays for the relocation expenses of the employee. Since this is solely for business and if the company can’t report this as reimbursements, the gross up is a way to cover the income taxes subject to the employee.
The gross up is mostly offered by companies for the executive positions in the USA. While the relocation expenses are certainly one of the most common, the bonuses on top of the total annual net income is also a reason why gross up is added.
How gross up is calculated when processing payroll?
When figuring out gross up payroll, you will need to have an idea of how much the employee owes in income taxes. You can follow a simple ratio when processing payroll to determine gross up amount.
Take the percentage of the employee’s gross salary and find the percentage of the gross up. For example, if an employee made $50,000 and the relocation expenses or any tax-free bonuses were $5,000, the ratio is 10:1 – 10 percent.
Next, determine the tax owed by the employee. You can then figure out the portion that needs to be grossed up. If the employee owes $6,000 in taxes, a minimum of $750 gross up is required to cover the income taxes that will be paid on this amount.
What you need to do when processing payroll is to add the gross up but accounted for the income tax that will be paid on this. That said, if the tax rate is roughly 12 percent, the gross up needs to be 12 percent more than $600 – totaling the gross up at $672.