What is 'Gross-Up'

Gross-up refers to increasing the gross amount of a payment to account for deductions, such as taxes. For example, Company ABC promises its employee a specific net amount.  To ensure the employee nets the guaranteed amount, Company ABC increases the employee's wages to a specific gross amount to account for tax withholding. 

BREAKING DOWN 'Gross-Up'

Grossing up is usually done for one-time payments such as reimbursements for relocations expenses or bonuses.  Depending on a company's calculation method, an employee may have an additional tax liability.

The Gross-Up Effect

Grossing up is mostly a matter of semantics. It merely restates an employee's salary as the take-home pay rather than gross pay before tax withholdings. Consider an employer offering an employee, who has an income tax rate of 20%, a net salary of $100,000 annually.  The employer must gross-up the wage to $125,000 to account for the required 20% tax withholding. Some companies prefer the gross-up method, especially when compensating C-level executives and other high-paid employees. The technique can partially conceal salary expenses during financial reporting.

Gross-Up Controversy

With executive pay coming under scrutiny in light of the 2008 financial crisis, grossing up has grown as an increasingly popular way to pay executives. Companies can efficiently increase executive pay by 30% or more, without it being apparent in their financial statements since those statements show only what employees net.

Several companies have made headlines for employing gross-up tactics with egregious and controversial results. In 2005, consulting firm Towers Perrin conducted a study which revealed that 77% of companies, when changing management, grossed up severance packages for outgoing executives. One such company was Gillette, purchased by Procter & Gamble in 2005. Gillette's departing chief executive officer (CEO), James Kilts, received $13 million in gross-up payments in his severance package.

RELATED TERMS
  1. Dividend Tax Credit

    The dividend tax credit is the amount that a Canadian resident ...
  2. Take-Home Pay

    Take-home pay is the net amount of income after taking out taxes, ...
  3. Gross Income

    Gross income is the total income from all sources before deductions ...
  4. Withholding Tax

    A withholding tax is a tax that is withheld from employees' wages ...
  5. Retention Tax

    A retention tax is any tax withheld from an employee's paycheck ...
  6. Gross Earnings

    1. For individuals, the total income earned in a year, as calculated ...
Related Articles
  1. Small Business

    A Close-Up On Gross Ups

    Learn about this hidden perk and why it's often bad news for investors.
  2. Personal Finance

    What's Your Employee Value?

    Have you ever wondered how much you're worth to your boss? Here's a method for calculating that value.
  3. Taxes

    Small Business Tax Obligations: Payroll Taxes

    Don't leave it up to your accountant - owners are ultimately responsible for fulfilling tax obligations.
  4. Insurance

    Life Insurance as a Bonus Plan for Key Employees

    A Section 162 plan is a life insurance plan provided by an employer to key employees.
  5. Taxes

    Understanding The U.S. Tax Withholding System

    Understanding the origins of our tax withholding system is crucial to getting the most out of it.
  6. Taxes

    Tax Withholding: Good For Government, Bad For Taxpayers

    It's important to understand where that money coming out of your paycheck goes and why - after all, you earned it.
  7. Retirement

    A Guide to Employee Stock Option Plans

    Stock option plans are among the ways employers can compensate employees. Here's how they work.
  8. Taxes

    When you should change your withholding tax

    When there are major changes in your life, you should adjust your withholding to ensure you aren't paying too much in taxes.
  9. Taxes

    Are You Paying Too Much in Taxes?

    Overpaying taxes amounts to an interest-free loan to the government. Here are some ways to avoid that scenario.
  10. Small Business

    Retirement Plan Comparison for the Self-Employed

    It's important for business owners and self-employed individuals to save for retirement, and with so many plans available, there is no reason not to.
RELATED FAQS
  1. Are gross sales and taxable gross sales the same thing?

    Learn the difference between gross sales and taxable gross sales and how these terms relate to the profit and tax liability ... Read Answer >>
Hot Definitions
  1. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  2. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  3. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  4. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  5. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  6. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
Trading Center