Understanding Grossing Up
Grossing up is a financial term used to describe the process of increasing a certain amount to account for taxes or other deductions, so that the recipient receives the full intended amount.
How Grossing Up Works
When an employer wants to give an employee a specific amount after taxes, they must calculate the grossed-up amount that includes the taxes to ensure the employee receives the correct net amount.
Example:
Let’s say an employer wants to give an employee a $1,000 bonus after taxes. If the total tax rate is 30%, the employer needs to gross up the bonus amount to $1,428.57, so that after a 30% tax deduction, the employee receives the intended $1,000.
Case Study:
In a recent survey, 70% of employers gross up relocation benefits for their employees to cover the taxes associated with the moving expenses. This practice ensures that employees are not burdened with unexpected tax liabilities for relocation benefits.
Benefits of Grossing Up
- Ensures recipients receive the intended amount
- Eliminates the surprise of unexpected tax deductions
- Helps employers attract and retain top talent by offering tax-neutral benefits
Grossing up is a common practice in corporate compensation and benefits to ensure fairness and transparency in financial transactions.
