How to gross up payroll: A step-by-step guide for employers

Let's say you want to give an employee a $1,000 take-home bonus. To cover the applicable taxes and ensure that they’ll actually take home the full bonus amount, you'll need to add money — or “gross up” — the payment.

Employers commonly use payroll gross-ups for bonuses, relocation allowances, severance, and other taxable payments. When calculating the right amount, you’ll need to account for taxes on the additional compensation, too.

In this article, we cover how to gross up payroll, calculate the payment, and avoid common mistakes.

A payroll gross-up is additional compensation that an employer pays to cover taxes and applicable deductions, so an employee receives a specific net amount.

Instead of starting with gross wages and subtracting deductions, you’ll work backward from the desired take-home amount. For example, to give an employee a $1,000 net bonus, you’ll have to pay more than $1,000 in gross wages to cover federal income tax, Social Security, Medicare, and any applicable state or local taxes. That way, once all the applicable taxes get deducted, they’ll still receive $1,000.

Remember, any additional compensation is also taxable. So, a gross-up will cover withholding on the payment, but not necessarily the employee's final income tax liability.

Employers commonly use gross-ups for these types of payments:

• Bonuses: You might gross up a payment to deliver a promised net performance bonus.
• Relocation expenses: You could use a gross-up to cover taxes on a taxable moving allowance.
• Severance payments: A gross-up can help you to meet an agreed-upon net severance amount.
• Sign-on or retention incentives: If you’re guaranteeing a payment to recruit or retain employees, you may need to do a gross-up to make sure the take-home amount matches the promised amount.
• Taxable fringe benefits: To cover withholding on certain employee benefits, you could gross up the payment.

Not every payment requires a gross-up, though. For example, reimbursements that meet IRS accountable plan requirements normally don't count as taxable wages, so a gross-up to cover taxes wouldn’t be necessary.

To calculate a payroll gross-up, you’ll need to know both the employee's desired net payment and which taxes or deductions will apply. To help you determine the latter, review the IRS’s Employer’s Tax Guide.

For U.S. employees, these may include the following.

These rates reflect employee withholding, not the full cost to the employer. Generally, employers will also need to pay their own share of Social Security and Medicare taxes, so you should also include those amounts when calculating the total cost of a grossed-up payment. Other deductions, including retirement contributions and wage garnishments, may also affect net pay.

For a broader explanation of these obligations, read Mercury's guide to payroll taxes.

This is the basic gross-up formula for payroll:

Gross payment = Desired net payment ÷ (1 − Total employee withholding rate)

When using this formula, express the withholding rate as a decimal. For example, use 0.30 for a 30% rate.

To calculate the additional compensation you're paying use this formula:

Gross-up amount = Gross payment − Desired net payment

These formulas assume a fixed combined withholding rate. Actual payroll calculations may require adjustments for wage limits, variable deductions, or different withholding methods.

Follow these five steps to calculate and process a grossed-up payment.

Step 1: Determine the desired net payment

Start with the amount you want the employee to receive after taxes.

For example, if you’re promising a $1,000 take-home bonus, $1,000 is your target net payment, not the gross amount you'll enter into payroll.

Step 2: Identify the applicable taxes and deductions

Determine which taxes apply based on the payment type, employee's earnings, and location.

For example, employees who have reached the annual Social Security wage base with your company generally won't owe additional Social Security tax on subsequent wages.

Some supplemental payments also qualify for a flat 22% federal income tax withholding rate.

Step 3: Calculate the gross payment

As covered in the previous section, use the gross-up formula to determine how much to pay before taxes:

Gross payment = Desired net payment ÷ (1 − Total employee withholding rate)

Divide the desired net payment by one minus the combined withholding rate.

Note: This formula works when withholding follows fixed percentage rates. For variable deductions or progressive withholding, use a payroll calculator.

Step 4: Enter the payment into payroll

Enter the full gross amount under the appropriate earnings category, such as a bonus or taxable relocation allowance.

Include the additional compensation in taxable wages, and account for any employer-side payroll taxes.

Step 5: Verify the employee's net pay

Preview your payroll to confirm that the employee will receive the intended amount. Check withholding, other deductions, and rounding differences. If you're paying the bonus alongside regular wages, compare the employee's take-home pay with and without the bonus.

For more details on processing payroll, read our article on how payroll works.

Imagine a startup wants to award an employee a $1,000 take-home bonus.

Assume the employee qualifies for 22% federal supplemental wage withholding, hasn't reached the Social Security wage base or Additional Medicare Tax threshold, and has no state or local withholding or other applicable deductions. So, you’ll need to account for Social Security (6.2%) and Medicare (1.45%).

That means the combined withholding rate will be:

22% + 6.2% + 1.45% = 29.65%

Next, calculate the the gross-up formula:

$1,000 ÷ (1 − 0.2965) = $1,421.46

So, the employer will pay $421.46 in additional gross compensation to deliver the employee the promised $1,000 bonus.

Here's the breakdown.

Note: This example excludes employer payroll taxes, which will increase the company's total expense.

The IRS considers bonuses, commissions, severance pay, and certain other payments supplemental wages. For supplemental wages totaling $1 million or less during the calendar year, employers generally use one of these two federal income tax withholding methods:

• Flat-rate method: Withhold 22% if you identify supplemental wages separately and meet IRS requirements, including having withheld federal income tax from the employee's regular wages during the current or preceding calendar year.
• Aggregate method: Combine supplemental and regular wages to calculate withholding, then subtract the federal income tax that you already withheld from the employee’s regular wages.

When an employee's supplemental wages exceed $1 million during the calendar year, employers must withhold federal income tax at 37% on the amount above that threshold. These rates exclude Social Security, Medicare, and applicable state or local withholding.

Read IRS Publication 15 for the full rules on how to handle bonuses and supplemental wages.

Gross-ups increase taxable wages, which generally increases employer payroll taxes.

In 2026, employers typically pay a 6.2% Social Security tax and a 1.45% Medicare tax on covered wages, subject to the Social Security wage limit. Federal and state unemployment taxes may also apply.

Returning to the $1,000 net bonus example we used earlier, here’s how a gross-up can affact employer payroll taxes.

In this example, the company will spend approximately $1,530.20 to deliver a $1,000 net bonus, excluding any unemployment taxes or other costs.

When calculating gross-ups, watch for these common mistakes:

• Using the employee's marginal tax bracket: Their income tax bracket may differ from the applicable payroll withholding rate.
• Forgetting taxes on the gross-up: The additional compensation is generally taxable, too.
• Ignoring state and local taxes: Federal withholding alone may not cover the employee's full deductions.
• Overlooking wage limits: Social Security withholding changes when employees reach the annual wage base.
• Grossing up nontaxable reimbursements: Qualifying accountable plan reimbursements generally don't require a gross-up.
• Underestimating employer costs: Additional gross wages may increase employer payroll taxes.

To catch and avoid discrepancies, always review the payroll preview before submitting a gross-up payment.

Manual calculations may work for straightforward payments with fixed withholding rates. But determining the gross-up needed for payments to employees with multi-state tax obligations, large bonuses, or variable deductions can require more complex calculations.

Payroll software with a net-to-gross feature can calculate the required payment using employee-specific withholding information. For unusual payments, consider consulting a payroll specialist or tax advisor.

For more on payroll administration, read how to do payroll for a small business.

By grossing up payroll, you’ll ensure that employees receive the promised take-home amount. But doing so will also increase your company's payroll expenses. Before committing to a net payment, calculate the required gross wages, factor in employer payroll taxes, and verify the amount through your payroll system.

Tracking payroll expenses alongside your other operating costs can help you manage cash flow as your team grows. To streamline your company’s workflows, Mercury can help you manage your business finances in one place, and Mercury Payroll lets you pay your team right from the account you already bank with.

^{This article is for informational purposes only and does not constitute legal, tax, investment, or financial advice. Founders should consult their own legal and financial advisors before making important financial decisions.}