What is a tax gross-up? A simple guide for US employers

Navigating the complexities of global tax management is no small feat for companies with international employees. 

One tool that helps both employers and employees is the tax gross-up, a practice that many organizations use to simplify tax burdens and create equitable compensation packages. 

But what exactly is a tax gross-up, and why should you consider it? Let’s break it down in a simple way.

What is a gross-up?

At its core, a tax gross-up is an additional amount of money employers provide to cover an employee's tax liabilities. Imagine you receive a $1,000 bonus, but after taxes, you only take home $700. A gross-up would be the extra payment from your employer to ensure that you receive the full $1,000 after taxes.

A tax gross-up neutralizes tax impacts, especially on bonuses, relocation expenses, or any other taxable compensation that could leave employees with less take-home pay than anticipated.

What is a tax gross-up used for?

A tax gross-up is commonly used by employers who want to make sure employees receive a net payment that matches the intended amount, regardless of the tax deductions. 

It ensures that employees enjoy the full value of their benefits or bonuses without worrying about losing a significant portion to taxes.

Employers may offer tax gross-ups as:

• Bonuses and incentives. Employers may offer gross-ups on performance bonuses or commissions to ensure that the reward isn’t diminished by taxes.

• Relocation expenses. When a company asks an employee to relocate, they often cover the associated costs, including taxes, to avoid the move being a financial burden.

• Benefits and perks. Some non-monetary benefits like company cars or housing allowances are taxable. To offset the employee's tax liability, employers offer gross-ups.

Employers may also offer gross-ups to streamline administrative processes. For instance, if an employer is reimbursing an employee for taxable relocation expenses, grossing up the amount saves the employee from needing to adjust their withholding or estimate their tax liability on the reimbursement.

Why would employers offer a tax gross-up?

For employers, offering a tax gross-up isn't just about fairness‌ — ‌it's a strategic decision that can make a difference in attracting and retaining top talent, especially in a competitive global job market. Here are the key reasons why employers might opt to offer gross-ups:

To attract top talent

Offering gross-ups on bonuses, stock options, or relocation packages makes a job offer more attractive. Potential employees compare not just salary but also the complete compensation package. It can also reduce friction during negotiations, especially for higher-level roles where executives expect to receive full value for the perks or benefits provided to them.

To maintain competitive global compensation

When hiring talent globally, tax systems can vary significantly. A gross-up ensures that employees in high-tax regions aren’t disadvantaged compared to those in lower-tax regions. This helps companies maintain competitive compensation structures no matter where their employees are located.

To simplify global tax compliance

Managing international tax regulations can get complicated fast, especially with differing rates and rules from one country to another. Offering gross-ups can simplify the process, ensuring employees don’t have to grapple with complex tax obligations while working across borders.

To enhance employee satisfaction

It also fosters goodwill and demonstrates that the company is willing to go above and beyond to support its employees' financial well-being. Employees appreciate it when companies go the extra mile to ensure their net pay isn’t diminished by unforeseen taxes. This can lead to greater loyalty, reduced turnover, and a happier workforce overall.

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What are the benefits of gross-up tax for employees?

From an employee perspective, receiving a gross-up is an advantage. Let’s take a look at the benefits for employees:

Increased take-home pay. A gross-up allows employees to enjoy the full benefit of bonuses, perks, or relocation assistance without being penalized by tax deductions. This results in higher net pay, which can be a key factor in job satisfaction and financial well-being.

Less stress about taxes. Navigating international tax laws and regulations can be incredibly stressful. Gross-ups take the guesswork out of taxes for employees, especially those working in high-tax jurisdictions. It removes the burden of calculating and covering taxes on their own, making the entire process smoother.

Fairness and transparency. A tax gross-up reflects a company’s commitment to fairness. Employees feel valued when their employer takes proactive steps to ensure they are not disadvantaged due to tax complexities. This transparency can foster trust and improve the employer-employee relationship.

Smoother Transitions for relocations. Relocating for a job can be daunting enough without the added concern of unexpected taxes. With a gross-up, employees don’t have to worry about their relocation benefits being diminished by taxes, allowing them to focus on adjusting to their new role and location.

How do you calculate a tax gross-up?

The process of calculating a tax gross-up may seem complicated, but it can be simplified with a straightforward formula. Here’s a step-by-step approach:

1. Determine the net payment

First, decide how much you want the employee to receive after taxes. This is the net payment. Let’s say, for example, you want the employee to take home $1,000.

2. Identify the applicable ‌rate Next, you need to identify the employee’s total tax rate. This will depend on the jurisdiction and the specific taxes being applied. Let’s assume the tax rate is 25%.

3. Use the gross-up formula

So, to ensure the employee receives $1,000 after taxes, you would need to pay them a gross amount of $1,333.33.

4. Confirm and adjust for other deductions

Finally, you’ll want to ensure there are no other deductions that might impact the final amount the employee receives. Make any necessary adjustments to the gross-up amount if other factors come into play.

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Simplifying global compensation with tax gross-ups

To attract and retain the best talent, every company needs to think about the benefits stack they can offer their team members. Whether it's equity incentives, stock options, or other financial incentives, it’s important to create a total rewards policy to keep employees motivated.

​​Tax gross-ups are a valuable benefit when included in a compensation package, as they effectively increase the net compensation an employee receives by covering the tax liability on certain perks or payments. 

Offering a tax gross-up is more than just a nice-to-have benefit‌ — ‌it’s a strategic move that helps businesses remain competitive. It’s also a tangible way to show employees that you value their work and are committed to supporting their financial well-being, no matter where they’re located.

If you want expert help on global employment and tax management, Remote is here to guide you. 

Download our Global Tax Management guide for insights or if you’re ready, get in touch and book a demo to learn how we can help your business manage international tax complexities with ease. 

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