What is a gross-up?

A gross-up is when an employer increases a payment so that, after tax is deducted, the employee is left with a specific net amount the employer intended them to receive. In effect, the employer covers the tax on top of the payment. Gross-ups are common for relocation costs, one-off bonuses, and certain expatriate payments, where the company has promised a clean net figure and does not want tax to erode it. The mechanics are simple, but the cost to the employer is higher than the headline amount.

When is a gross-up used?

Gross-ups appear whenever an employer wants to guarantee the value an employee actually keeps. Typical cases include the following.

• Relocation: covering moving costs so the employee is not taxed on the support provided.
• Sign-on or one-off bonuses: promising a specific net bonus to a new hire.
• Expatriate pay: ensuring an internationally assigned employee receives a guaranteed net package.

How does a gross-up work?

The idea is to work backwards from the net figure to the gross figure that produces it. The steps are straightforward.

1. Start with the net target: decide the amount the employee should keep after tax.
2. Apply the tax rate: divide the net amount by one minus the applicable tax rate to find the gross.
3. Pay and withhold: pay the higher gross amount, then withhold tax, leaving the intended net.

A simple worked example

Suppose an employer wants an employee to receive 1,00,000 rupees (about 1,200 US dollars) net, and the applicable tax rate is 30 percent. The gross amount is the net divided by 0.70.

The employer pays about 1,42,857 rupees (about 1,714 US dollars) so the employee keeps the intended 1,00,000 rupees after tax. Real calculations use the employee's actual marginal rate, which can make the gross-up cost more.