Picture a $10,000 sign-on bonus. The employee opens the welcome packet and sees the number, then opens the first paycheck and finds $6,000 actually arrived because of federal tax, state tax, FICA, and supplemental wage withholding. That gap is exactly what a gross-up is designed to close. When an employer wants to deliver a specific net amount to an employee, the gross-up calculation works backwards from that net target to compute the gross figure that has to be paid in. Gross-ups are common in relocation reimbursements, sign-on bonuses, severance packages, and taxable fringe benefits where the employer has agreed to make the employee whole after tax.
How a Gross-Up Calculation Works The basic formula is: gross amount = net target divided by (1 minus combined tax rate). If an employer wants the employee to net $10,000, and the combined federal, state, and FICA tax rate is 35 percent, then gross amount = $10,000 / (1 - 0.35) = $15,385. The employer pays $15,385, withholds $5,385 in tax, and the employee nets exactly the $10,000 target.
The challenge is the combined tax rate, because federal income tax on supplemental wages, FICA (which has its own wage base), state tax, and any local tax all stack differently. Most payroll systems handle the calculation, but the rates have to be set correctly for the specific employee and the specific item being grossed up.
How Do You Calculate the Combined Tax Rate? Combine federal supplemental wage withholding (22 percent for amounts under $1 million per year, 37 percent above that), the employee's state income tax rate, FICA (7.65 percent up to the Social Security wage base of $184,500 in 2026, then 1.45 percent above), and any local tax. For an employee already over the Social Security wage base, the FICA portion drops, which changes the formula. Payroll software calculates this per employee in real time.
When Employers Use Gross-Ups Relocation reimbursement is the classic case. Tax law requires reimbursed moving expenses to be treated as taxable income for most employees (the moving expense exclusion was suspended through 2025 and most of 2026 except for active-duty military), so an unremedied $10,000 relocation reimbursement might net the employee only $6,500. Employers who want to honor the full intent of the reimbursement gross it up.
Sign-on bonuses paid as a single lump sum are often grossed up so the candidate sees the promised amount. Severance packages may include gross-ups for state-required additional payments or for components the employer wants to deliver as a guaranteed net. Taxable fringe benefits, like personal use of a company vehicle or club memberships, sometimes get grossed up for executive employees as part of total rewards design.
What Tax Rates Go Into a Gross-Up Formula Five rates routinely show up. Federal supplemental wage withholding (22 percent below $1 million per year, 37 percent above). State income tax on supplemental wages, which varies widely (zero in nine states, up to 13.3 percent in California). FICA (Social Security 6.2 percent up to the wage base, Medicare 1.45 percent on all wages, plus 0.9 percent additional Medicare on wages over $200,000). Local income tax in jurisdictions that impose one. State unemployment tax, which the employer pays directly but which sometimes factors into gross-up modeling for total cost.
Some gross-ups use a flat rate (like a 35 percent assumption), which is simpler but produces small gaps versus the actual tax. Iterative gross-ups recalculate at the actual marginal rate after each round; flat-rate gross-ups settle for "close enough" with the trade-off of potential under-grossing.
Setting Up Gross-Ups in Payroll Without Year-End Surprises Three things prevent gross-up problems. Document the policy: which items get grossed up, at what rate, and under what authorization. Configure the payroll system per item type rather than running ad hoc calculations, so the math is repeatable. And reconcile gross-ups against year-end totals because grossed-up supplemental wages still flow through the W-2 and still count toward Social Security wages and the FICA base.
The most common gross-up problem is under-grossing because the calculation used last year's tax rates or didn't account for FICA wage-base impact. Audit gross-up calculations annually against actual tax outcomes and update the rate assumptions when federal or state law changes. Pair the work with payroll setup, net pay validation, FICA tracking, and W-2 form reconciliation. The IRS Publication 15 (Circular E) covers federal supplemental wage withholding rules and the deposit schedules that apply.
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