Gross-Up

A gross-up is an increase to a payment so the employee takes home a promised amount after taxes. If you promise $1,000 net, you pay more than $1,000 gross to cover the withholding.

A common shortcut is adding the tax rate on top of the net amount. That falls short, because the added money is taxed too.

Why Do Employers Gross Up Payments?

A gross-up is a promise the employer chooses to make, usually when a payment is stated as a net amount. The IRS rules only decide how the payment is taxed. Common triggers include:

• Relocation: the 2026 Publication 15-B says the exclusion for qualified moving expense reimbursements is permanently eliminated, with narrow exceptions.
• Bonuses and awards: Publication 15 lists both as supplemental wages.
• Expense allowances: payments under a nonaccountable plan are supplemental wages too.

Taxable fringe benefits, which our imputed income guide covers, are supplemental wages as well, so the same arithmetic applies to them.

How Do You Calculate a Gross-Up?

The formula is gross payment = net amount desired / (1 - combined tax rate). The combined rate adds every tax taken from the payment, such as federal income tax withholding and the employee's Social Security and Medicare.

Example for 2026: promise a $1,000 net bonus, withheld at the flat 22% rate that Publication 15 allows for separate payments, plus 7.65% employee FICA (6.2% Social Security and 1.45% Medicare, per IRS Topic 751).

• Combined rate: 22% + 7.65% = 29.65%.
• Gross payment: $1,000 / (1 - 0.2965) = $1,421.46.
• Check: $1,421.46 x 29.65% = $421.46 withheld, leaving $1,000.

This ignores state and local tax, and assumes the employee is under the $184,500 Social Security wage base for 2026.

Is a Gross-Up Taxable, and What Does It Cost?

Yes. The whole grossed-up amount is wages. Publication 15 says that when an employer pays an employee's Social Security and Medicare share without deducting it, the payment is wages, and that increase is itself subject to those taxes.

The employer also pays its own 7.65% match. In the example, that is $108.74 on $1,421.46, so a $1,000 net bonus costs $1,530.20, about 53% more than the promised amount.

What Are the Risks of Grossing Up?

The main risk is a rate that is too low. The employee then nets less than promised, and you owe a correcting payment that must be grossed up as well. Rates move when:

• State or local tax is left out of the combined rate.
• The employee crosses the Social Security wage base mid-year.
• Supplemental wages pass $1 million, where the excess is withheld at 37%.

The second risk is budget. The quoted net figure hides the real cost, which is the gross payment plus employer tax. Plan the full amount before you promise a net number.

How Does HR Cloud Help With Gross-Up Payments?

HR Cloud does not calculate gross-ups or withholding; your payroll system does that. HR Cloud offers two-way payroll integrations that send employee time to payroll and import employee data from payroll.

Its People HRIS keeps one record per employee for job, pay, and performance data. You can request a demo to see how it works.

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Frequently Asked Questions

Q: Can you gross up a gift card?

A: Yes. Publication 15-B says gift cards are cash equivalents that are never excludable, so they are taxable wages. Gross up the card value for the employee to keep the full face amount.

Q: Are there exceptions for moving expenses?

A: Yes. Per Publication 15-B, the exclusion remains for active-duty Armed Forces members moving under a military order and for certain intelligence community employees. Other reimbursements are taxable wages.

Q: How do I add state tax to the formula?

A: Add the state rate to the combined rate. With a hypothetical 4% state rate, the combined rate is 33.65%, and a $1,000 net bonus becomes $1,000 / 0.6635 = $1,507.16.

Q: How do you gross up under the aggregate method?

A: No single rate applies, because tax on the combined pay changes with the bonus size. Recalculate the gross payment until the net result matches the amount promised.

Q: Does the Additional Medicare Tax change the rate?

A: Yes, on wages above $200,000 in a calendar year. Employers withhold an extra 0.9% with no employer match, so employee Medicare is 2.35% there, and Social Security has already stopped at $184,500.

Q: Is a gross-up the same as gross-to-net?

A: No. Gross-to-net starts with gross pay and subtracts taxes. A gross-up works backward from a target net. See our gross vs net payroll guide.