Arizona Gross-Up Calculator
(Plus Net-to-Gross Pay Instructions)
The net-to-gross calculator available on this page helps employers quickly determine pre-tax gross pay starting from a desired net take-home pay. This free tool makes gross-up calculations easy, allowing you to convert after-tax amounts to their equivalent value before deductions. Below, we provide essential information and calculation examples.
Why Use a Gross-Up Calculation?
Grossing up (also known as a “net-to-gross calculation”) is typically used to ensure an employee receives a specific amount of money for special, one-time payments such as bonuses or moving costs. When an employee receives extra wages of this type (also called supplemental wages), the IRS considers them income, and they are therefore subject to taxes. Employers sometimes opt to add a gross-up amount to the employee’s payment to cover the income taxes the recipient will owe.
How It Differs from Standard Payroll
When calculating take-home pay for your employees under a standard payroll process, you start with their gross salary (all the money they earned), withhold payroll taxes, and then write a check for the resulting net pay amount.
As you might guess, grossing up takes the opposite approach. You first determine what you want your employee’s net pay to be (the actual dollar amount the employee takes home), and then you work backward to figure out the gross pay needed.
To better understand how a gross-up calculation can work for a company’s small business payroll, let’s look at a common use case.
The Gross-Up Concept and Calculation
What is the Gross-Up Rule?
The “gross-up” rule is a practice where an employer increases the gross amount of a payment to cover the income taxes that the recipient will owe on that payment. This guarantees that the employee receives a specific net dollar amount after taxes are withheld. One-time payments such as bonuses, relocation expenses, or other taxable fringe benefits are common scenarios where gross-ups are applied.
While a specific “IRS gross-up rule” doesn’t formally exist, the concept of tax gross-up is a general practice recognized by the IRS in the context of fringe benefits and one-time payments. Employers can also reference PMTA 2018-015 for more guidance from Uncle Sam.
How Do You Calculate a Gross-Up?
To understand the calculation, it is helpful to treat it as a math equation using the following formula:
Let’s use this to gross up a $700 bonus.
In the equation above, the desired net pay is the amount of take-home pay an employer wants the employee to receive after taxes are withheld. The “Tax Rate” in the equation is the sum of all the necessary tax rates, which must include:
Supplemental tax rate (federally set at 22%)
Social Security: 6.2%
Medicare: 1.45%
When we add the rates up, the total comes to 29.65%. We will use this rate as a decimal in the equation, so that is .2965.
1-Subtract the Tax Rate from 1:
2-Divide the Net Pay ($700) by the resulting rate (0.7035):
3-Verify the Withholding Amount:
- Verify the Net Pay:
Therefore, the gross-up (or extra pay the employer contributes to ensure the employee reaches the desired net pay) is $295.
Common Scenarios for Net-to-Gross Pay
Now that we’ve covered the math, let’s discuss some examples of when an employer may decide to use a gross-up.
Incentives for New Hires
Bonus pay can help a new hire feel confident that joining your team is the right move. Employers should remember that this type of supplemental wage is subject to federal income tax. Using a gross-up (which covers the income taxes the new employee will owe) is a way to ensure the staffer receives the full dollar value of the bonus.
Why use a gross-up here? A top recruit may not fully understand the tax implications of perks like supplemental wages and just expect to receive the total promised bonus amount. To build goodwill and avoid confusion, grossing up a bonus can go a long way toward keeping the newest member of your team happy.
Commission-Based Pay
Many salespeople know they are due a pay bump when they hit a sales quota. However, seeing what their actual take-home pay is once taxes are withheld can be an unpleasant surprise.
For businesses that rely on sales professionals, a gross-up can be used to ensure that employees receive the full commission amount after taxes and other deductions are factored in.
Why use a gross-up here? Sales teams will appreciate that their employer is going the extra mile to make sure they receive the full value of their commissions, which can help teams stay motivated to close more deals.
Relocation Expenses
Are you hiring an employee who has agreed to relocate? They will almost certainly incur expenses. A gross-up can make a big difference in helping to offset moving expenses.
Why use a gross-up here? It is a good way to start the employer/employee relationship off on a positive note. Using a gross-up to cover costs and help with the tax obligations related to the move is another way to show appreciation for a new hire making the trek to join your team.
Grossing Up Relocation Example
Let’s say your small business is in Southern California, and you want to hire Judith, who lives in Northern California. To get her to take the job, you offer a one-time signing bonus to cover her $5,000 moving expenses.
That $5,000 bonus is technically taxable as a fringe benefit, so paying Judith a gross wage of $5,000 means she only takes home $3,750 after a hypothetical 25% income tax rate is applied. Since she still has to pay her movers $5,000, she would be $1,250 short.
To fix this, you can gross up her bonus check. To do this, you work backward: divide the desired net pay ($5,000) by the remaining percentage (75%, or 0.75).
As a result, Judith’s gross signing bonus comes out to $6,666.67. Judith is happy because she receives the full $5,000 to pay her movers. You’re happy because you’ve convinced the top candidate to join your business.
If crunching all the numbers becomes too much, you have other options. Most processes, including withholding taxes and deductions, can be automated by outsourcing this work to one of the many online payroll providers on the market. These services do the heavy lifting, leaving you more time to concentrate on other aspects of your business. The Beyond system specializes in simplifying these complex calculations.
Final Considerations for Grossing Up
Remember that employers are liable for payroll taxes on any supplemental income employees receive. This includes both the FUTA and SUTA tax, as well as the Medicare and Social Security contributions that employers are responsible for.
Drawbacks of Mishandling Grossing Up
If a gross-up is not calculated correctly, it can have the opposite impact—causing heartache instead of goodwill and often triggering extra work for everyone involved. That means it’s critical to ensure your gross-up calculations are spot on. The negative consequences of miscalculating include:
Causing extra work for your accounting or payroll department to recalculate and correct the error.
Increased taxes for the employee who received the extra pay, which can diminish morale and impact their desire to remain with the company.
The need to amend tax returns on the employee’s part when an incorrect W-2 is involved in the error.
In the worst-case scenario, the incorrect gross-up calculation could result in an IRS audit for the company, the employee who received the supplemental pay, or both.
Get Grossing Up Right
Grossing up a payment, whether with or without a net-to-gross calculator, ensures employees receive a specific after-tax amount for special one-time payments like bonuses or moving expenses. This method accounts for federal income tax obligations, allowing employers to cover the employee’s tax liability so companies can guarantee that staff members receive the full intended value of their bonus or reimbursement—simplifying accounting and keeping employees happy.
Let’s say your small business is in Southern California, and you want to hire Judith, who lives in Northern California. To get her to take the job, you offer a one-time signing bonus to cover her $5,000 moving expenses.
That $5,000 bonus is technically taxable as a fringe benefit, so paying Judith a gross wage of $5,000 means she only takes home $3,750 after a hypothetical 25% income tax rate is applied. S15ince she still has to pay her movers $5,000, she would be $1,250 short.
To fix this, you can gross up her bonus check. To do this, you work backward: divide the desired net pay ($5,000) by the remaining percentage (75%, or 0.75).
As a result, Judith’s gross signing bonus comes out to $6,666.67. Judith is happy because she receives the full $5,000 to pay her movers. You’re happy because you’ve convinced the top candidate to join your business.
If crunching all the numbers becomes too much, you have other options. Most processes, including withholding taxes and deductions, can be automated by outsourcing this work to one of the many online payroll providers on the market. These services do the heavy lifting, leaving you more time to concentrate on other aspects of your business. The Beyond system specializes in simplifying these complex calculations.
After learning more about grossing up, you may find another resource useful. We cover everything a business needs to know about payroll processing, from applying for an employer identification number (EIN) to how wages are calculated.