how a gross up works
grossing up a paycheck is essentially computing a paycheck but in reverse usually employees are initially paid a gross paycheck amount from which deductions are thus withheld such as taxes retirement contributions and social security and the employees are paid the remainder as net pay in a gross up situation the desired net pay is arranged in advance and the gross is sufficiently increased to ensure that the desired net pay is handed to the employee as a practice grossing up is most often done for one time payments such as reimbursements for relocation expenses or end of year bonuses depending on a company s calculation method an employee may still have an additional tax liability in truth grossing up is mostly a matter of semantics it merely restates an employee s salary as take home pay rather than gross pay before tax withholding some companies prefer the gross up method especially when compensating c level executives and other high paid employees the technique can partially conceal salary expenses during financial reporting example of gross upas an example consider a company offering an employee who has an income tax rate of 20 a net salary of 100 000 annually the formula for grossing up is as follows the employer must gross up the salary paid to the employee to 125 000 in order to account for the required 20 paid on income because 125 000 1 0 20 100 000 the gross up controversywith executive pay coming under increased scrutiny in light of the 2007 2008 financial crisis grossing up has grown as an increasingly popular way to pay executives companies can efficiently increase executive pay by 30 or more without it being apparent in their financial statements since those statements show only what employees net nonetheless several companies have made headlines for employing gross up tactics with egregious and controversial results in 2005 consulting firm towers perrin now wtw conducted a study revealing that 77 of companies when changing management grossed up severance packages for outgoing executives one such company was gillette purchased by procter gamble in 2005 gillette s departing chief executive officer ceo james kilts received 13 million in gross up payments in his severance package in addition with the rise of the gig economy working from home and entrepreneurship grossing up is hard to determine since the total income of the individual is unknown as it includes multiple streams of income in addition to the full time jobs 