Gross-up

A gross-up is when an employer increases an employee’s paycheck to cover the taxes on a specific benefit or payment, so the employee receives the full intended amount after taxes.

Homebase Team

Min Read

What is a gross-up?

A gross-up is when an employer increases an employee’s paycheck to cover the taxes on a specific benefit or payment, so the employee receives the full intended amount after taxes. It’s often used for bonuses, relocation assistance, or other taxable fringe benefits. By grossing up a payment, the employer pays the additional taxes on behalf of the employee, ensuring the employee isn’t left with less than promised due to withholding.

Understanding how gross-ups work is especially useful for small business owners when offering one-time perks or reimbursing employees for expenses. With tools like Homebase Payroll, it’s easier to calculate and apply gross-ups accurately during payroll runs.

How does a gross-up work?

Let’s say you want to give an employee a $1,000 bonus, and you want them to take home the full $1,000 after taxes. If you simply pay $1,000, taxes will be withheld, meaning the employee could receive significantly less.

To ensure they walk away with exactly $1,000, you need to "gross up" the payment. This means you calculate how much extra to pay so that, after tax withholding, the net payment equals the intended amount.

The formula generally looks like this:

Gross-up amount = Desired net payment / (1 - tax rate)

So if the tax rate is 30%, and the employee should receive $1,000:

$1,000 / (1 - 0.30) = $1,428.57

You’d pay the employee $1,428.57. After 30% in taxes, their take-home pay is still $1,000.

When should businesses use gross-ups?

Employers typically use gross-ups for one-time or special payments that they want the employee to receive in full, such as:

Bonuses or incentive pay
Relocation reimbursements
Education or student loan reimbursements
Taxable benefits like gift cards or housing stipends
Reimbursements for travel expenses that are considered taxable

Gross-ups can be a great way to show appreciation and support for your employees, especially regarding bonuses or perks that might otherwise get eaten up by taxes. If you’re handling payroll manually, gross-ups can get tricky. But with the right system, they’re easy to manage—and your team will appreciate the gesture.

Sign up for Homebase to take the stress out of payroll, easily manage gross-ups, and keep your team happy.

Are gross-ups required by law?

No, employers are not legally required to gross up payments. It’s a discretionary benefit. That said, if you’ve promised an employee a specific amount, grossing it up ensures they receive the full benefit, which can strengthen trust and satisfaction.

You’ll want to document any gross-up arrangements clearly and be consistent about when and how you apply them.

Pros and cons of offering gross-ups

Pros:

Helps employees receive the full intended benefit
Builds goodwill and strengthens retention
Shows you’re aware of the financial impact of taxes
Useful in recruitment and executive compensation packages

Cons:

Increases payroll costs for the employer
Can be complex to calculate without payroll software
Needs to be tracked accurately for tax and accounting purposes

How to calculate a gross-up

To calculate a gross-up manually, use the formula above and plug in the applicable combined tax rate. Keep in mind:

The total tax rate includes federal, state, Social Security, and Medicare
The rate may vary depending on the employee’s location and income level
It’s best to consult a payroll provider or accountant for high-precision calculations

How Homebase Payroll simplifies gross-ups

With Homebase Payroll, you don’t have to guess or manually crunch numbers. Our platform:

Automatically calculates gross-ups based on tax settings
Applies the correct withholding rates based on employee location and status
Tracks taxable and non-taxable payments for accurate reporting
Ensures compliance with federal and state payroll tax requirements

Try Homebase Payroll to handle bonuses, reimbursements, and other one-time payments with ease.

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