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. 

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.

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

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 payroll system, they’re easy to manage—and your team will appreciate the gesture.

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:

Cons:

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

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

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