# Understanding Gross-Up: Definition, Formula, Examples & Calculation

![Gross-Up Calculation](https://www.investopedia.com/thmb/V6wWj1lFSvRZspAOQE_wjM0IyuM=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/gross-up-final-4c954a62f820448cae7d9a01537ff1b1.jpg)

*— Sydney Burns / Investopedia*

## What Is a Gross-Up?

A gross-up is an additional amount of money added to a payment to cover the [income taxes](https://www.investopedia.com/terms/i/incometax.asp) that the recipient will owe on the payment. They are often used when employees receive a cash benefit, including severance plans, relocation expenses, and cash bonuses.

The practice also occurs in [executive compensation](https://www.investopedia.com/articles/stocks/07/executive_compensation.asp) plans. For example, a company may agree to pay an executive’s relocation expenses, plus a gross-up to offset the expected income taxes that will be owed on this payment (and salary payment). Gross-ups can sometimes be controversial when they contribute to extravagant executive compensation.

### Key Takeaways

*   A gross-up is a method used by employers to cover the tax liability on specific payments to employees, ensuring they receive the full intended amount after taxes.  
    
*   Gross-ups are commonly used in one-time payments such as bonuses, severance packages, and relocation expenses.  
    
*   The formula for calculating a gross-up involves dividing the net payment by (1 minus the tax rate) to find the necessary gross payment.  
    
*   There is controversy surrounding gross-ups, particularly in executive compensation, where they can obscure the true cost of executive pay in financial statements.  
    
*   Despite criticism, gross-ups remain a popular tool for concealing salary expenses and increasing executive compensation without affecting reported net income.

## Understanding the Gross-Up Process

Initially, employees receive their gross pay, which is the total amount before any deductions like taxes, retirement contributions, or Social Security. After these deductions, employees receive the remainder, known as "net pay" or "take-home pay."

To gross up a payment, calculate the desired net pay, then increase the gross pay enough to cover tax withholdings and ensure the net amount is correct.

As a practice, grossing up is most often done for one-time payments, such as reimbursements for relocation expenses or end-of-year bonuses. Depending on a company’s calculation method, which may be their best approximation of an employee's tax liability, that employee may still have an additional [tax liability](https://www.investopedia.com/terms/t/taxliability.asp).

Some companies prefer to represent the compensation of their C-level executives and other high-paid employees using grossing up. One reason is to partially hide salary expenses in financial reports.

## Gross-Up Calculation Example

For example, consider a company offering an employee a net salary (take-home pay) of $100,000 annually. This employee has an income tax rate of 20%. The formula for grossing up is as follows:

*   **Gross pay** = net pay / (1 - tax rate)

The employer must gross up the salary paid to the employee to $125,000 to account for the required 20% paid on income—because $125,000 × (1 - 0.20) = $100,000.

## Controversy Surrounding Grossing-Up

Executive pay, including severance packages, came under increased scrutiny in the aftermath of the 2007–2008 financial crisis, when it was revealed how much some executives were earning—despite their companies' downfalls, widespread layoffs of employees of lower seniority, and government bailouts.

As a result of this increased scrutiny, the practice of grossing up became a more popular way to pay executives. Companies can boost executive pay by 30% or more, often without this being obvious in [financial statements](https://www.investopedia.com/terms/f/financial-statements.asp), as these reports only show net pay.

Nevertheless, some companies still employed gross-up tactics. 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.  

## What Does 'Grossed Over' Mean?

When a film, for example, is said to have "grossed over $200 million," it means that it earned that particular amount of money before any taxes were paid or costs were taken away. While the word "gross" has different meanings—including "disgusting" when the word is used as an adjective—when gross is used as a noun, it can refer to "the total amount of something, especially money, before anything has been taken away."  

## What Is Adjusted Gross Income?

[Adjusted gross income (AGI)](https://www.investopedia.com/terms/a/agi.asp) is a measure of income used by the Internal Revenue Service (IRS) to assess a taxpayer’s tax liability. AGI equals your gross income minus any tax deductions and adjustments to income.

## What Is Gross Profit Margin?

[Gross profit margin](https://www.investopedia.com/terms/g/gross_profit_margin.asp) is the amount of a company’s revenue after subtracting the cost of goods sold (COGS), which includes labor and materials. Gross profit margin is one financial metric that can be used to assess how efficient a business is at managing its operations. It is expressed as a ratio.

## The Bottom Line

Gross-up refers to additional pay an employer pays an employee for the specific purpose of offsetting any additional income taxes that the employee might incur as a result of the payment.

Usually, the practice of grossing up is done when an employee receives a one-time cash benefit from the company, such as relocation expenses or a bonus check. Gross-up pay is calculated by dividing the employee’s wages by the net percentage of taxes that would be due.

Gross-ups are controversial when used for executive compensation, because they can be used to conceal costs in financial statements. Companies that use them should expect to be scrutinized for the practice.

> **Article Sources**
>
> 1.  Dong, Gang Nathan. "[Excessive Financial Services CEO Pay and Financial Crisis: Evidence from Calibration Estimation](https://www.sciencedirect.com/science/article/abs/pii/S0927539813000790)." _Journal of Empirical Finance_, vol. 27, June 2014, pp. 75-96.
>     
> 2.  TIME. "[James Kilts - Biggest Golden Parachute](https://content.time.com/time/specials/packages/article/0,28804,1848501_1848500_1848489,00.html)."
>     
> 3.  Congressional Research Service. "[Federal Individual Income Tax Terms: An Explanation](https://crsreports.congress.gov/product/pdf/RL/RL30110)." Summary Page.