A gross-up is when an employer increases a payment so that, after taxes are withheld, the employee receives a specific net amount. It's common for sign-on bonuses, relocation payments, awards, and taxable fringe benefits where the employer wants to cover the tax cost.
Key takeaways
- The basic formula is gross payment = desired net / (1 - total tax rate).
- The total rate usually includes federal supplemental withholding, FICA, and state and local taxes.
- The extra tax paid by the employer is itself taxable, which is why the formula divides instead of adds.
- Most employer-paid moving expenses have been taxable wages since 2018, so relocation is a frequent gross-up.
How gross-up works
Without a gross-up, a $5,000 bonus might land as about $3,300 after taxes. If the employer promised $5,000 in hand, it needs to pay more. Simply adding the tax amount doesn't work, because the added amount is also taxed. The standard approach divides the target net by one minus the combined tax rate.
For a bonus paid separately, the federal portion often uses the 22% supplemental rate. Add 7.65% for FICA (or 1.45% if the employee has passed the Social Security wage base) and the applicable state and local rates. Payroll systems have a gross-up feature that runs this calculation automatically (IRS Publication 15 (Circular E), Employer's Tax Guide).
Gross-ups appear on the W-2 as wages. The employee's actual tax liability is settled on their return, so a gross-up guarantees the net payment, not the final tax outcome.
Gross-up example
A company promises a new director a $10,000 net sign-on bonus. She lives in a state with a 5% supplemental rate and is below the Social Security wage base.
| Combined rate: 22% + 7.65% + 5% | 34.65% |
|---|---|
| Gross payment: $10,000 / (1 - 0.3465) | $15,302.22 |
| Taxes withheld | $5,302.22 |
| Net to employee | $10,000.00 |
Adding just the tax on $10,000 ($3,465) would give a gross of $13,465, which nets only about $8,800 after withholding on the larger amount.
Why gross-up matters for employers
Gross-ups keep promises clear. If an offer letter says "$10,000 sign-on bonus," most employees expect $10,000, and the difference causes frustration on day one. Writing "a $10,000 sign-on bonus, grossed up for taxes" or "a $10,000 gross bonus" removes the ambiguity.
They also cost more than they look. The employer's real cost includes the grossed-up wages plus its own FICA match. With compensation costs up 3.3% in the year to June 2026 (BLS, compensation cost growth to June 2026), finance teams want gross-ups budgeted rather than discovered at payroll time. Use our employer payroll tax calculator to see the full cost.
Common gross-up mistakes to avoid
Adding the tax instead of dividing
The added amount is also taxed, so simple addition leaves the employee short.
Forgetting state and local taxes
Include every tax that will be withheld.
Ignoring the wage base
High earners past the Social Security wage base need a lower FICA rate in the formula.
Unclear offer language
Say whether a bonus is gross or net in writing.
Gross-up: questions people also ask
How do you calculate a gross-up?
Why do employers gross up payments?
Is a gross-up taxable?
Are relocation expenses grossed up?
Does a gross-up guarantee no tax at filing?
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HRTally glossary entries are written by people who have run US payroll, benefits, and HR operations, then checked line by line against primary sources such as the IRS, Department of Labor, EEOC, and Bureau of Labor Statistics. Dollar limits and rates are for 2026 unless stated. We review every entry at least twice a year and whenever a rule changes. This page explains general rules and isn't legal or tax advice; state law can differ. Read our editorial standards.
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<blockquote>A gross-up is when an employer increases a payment so that, after taxes are withheld, the employee receives a specific net amount. It's common for sign-on bonuses, relocation payments, awards, and taxable fringe benefits where the employer wants to cover the tax cost.</blockquote><p>Source: <a href="https://www.hrtally.com/hr-glossary/gross-up/">HRTally HR Glossary, Gross-up</a></p>
Written by the HRTally Research Team
Our guides are written and reviewed by people with hands-on US HR, payroll, and HR technology experience. Legal and tax facts are checked against primary sources, such as the Department of Labor, IRS, EEOC, and USCIS, and linked at the end of each guide. Vendors never review or pay for our editorial content.