Calculation of Gross-Up - Worked Example

Author: Ryan F. Donovan

Updating Author: Alice Gilman

An employer may make a payment of wages when it has a desired net and wants to "gross up" the amount so that the employee is paid enough wages to achieve the desired net. This is known as a "net to gross," whereas the normal paycheck calculation is a gross to net. Gross to net is when gross pay is figured and then taxes are deducted from that amount. A net to gross is when the desired net pay is fixed and gross is increased sufficiently to achieve the desired net when taking taxes into account.

Scenario 1 - Below Social Security Limit

Acme Widget Corporation wants to pay a net bonus of $250 to employee Joe Smith. The bonus will be grossed up for Social Security and Medicare (FICA) tax. Joe Smith is not currently near the 2017 Social Security taxable wage limit of $127,200.

To calculate the gross to be paid to Joe, Acme must do the following:

  1. Calculate the total of all tax percentages involved in the gross-up. The first mathematical step to do a gross-up manually is to add the percentages of all the taxes involved in decimal form and subtract the total from 1. The current employee Social Security tax rate is 6.2%, or 0.062 in decimal form. The current Medicare tax rate is 1.45%, or 0.0145 in decimal form. The total FICA tax rate is 0.0765 (0.062 + 0.0145 = 0.0765). Subtracting that sum from 1 yields 0.9235 (1.00 - 0.0765 = 0.9235, or 92.35%).
  2. Divide the desired net pay by the sum from step 1. Since the desired net pay is $250, Acme must divide it by 0.9235. The result is the gross pay that is needed to yield a net of $250 while withholding only FICA. The necessary gross is $270.70 ($250 ÷ 0.9235 = $270.70, as rounded to the nearest penny).
  3. Check the math. To check that the math is correct, multiply $270.70 by 6.2% ($270.70 × 0.062 = $16.78), and $270.70 by 1.45% ($270.70 × 0.145 = $3.93). The total FICA tax amount is $20.71 ($16.78 + $3.93 = $20.71). Subtract the FICA total from the necessary gross to achieve the desired net of $250 ($270.70 - $20.71 = $250). If the numbers are not within a penny or two, a mistake was likely made in the calculation.

Scenario 2 - Near Social Security Limit

Joe Smith is to receive a net bonus of $250 from Acme Widget Corporation. The bonus will be grossed up for Social Security and Medicare (FICA) tax. Joe Smith has already paid $126,950 in Social Security taxes. The 2017 Social Security taxable wage base is $127,200.

  1. Calculate the Social Security tax. Since Joe is only $250 short of the Social Security withholding limit and his gross pay will push him over the limit, the Social Security tax withheld on this gross-up is $15.50 ($250 × 0.062 = $15.50).
  2. Add the Social Security tax to the desired net pay. Add the Social Security tax amount from Step 1 to the desired net pay ($250 + $15.50 = $265.50). This slightly higher resulting amount must be grossed up.
  3. Gross up for Medicare tax. The other tax to account for on a FICA-only gross-up is Medicare. The Medicare tax rate, in decimal form, must be subtracted from 1 (1.00 - 0.0145 = 0.9855). To get the necessary gross for this check, divide the $265.50 from Step 2 by 0.9855 ($265.50 ÷ 0.9855 = $260.94, as rounded up to the nearest penny).
  4. Check the math. To check the math, multiply $260.94 by 0.0145, the Medicare tax rate ($260 × 0.0145 = $3.91). Subtract $3.91 from $260.94 ($260.94 - $3.91 = $257.03). The $15.50 in Social Security tax is then subtracted ($265.50 - $15.50= $250) to arrive at the desired net bonus amount of $250. If the final answer on your math check is not within a penny or two of the desired net, a mistake was likely made.

Scenario 3 - Over Social Security Limit

Joe Smith will receive a net bonus of $250 from Acme Widget Corporation. The bonus must be grossed up for any applicable Social Security and Medicare taxes. Joe Smith is already over the 2017 Social Security taxable wage base of $127,200, so no Social Security tax will need to be withheld on this gross-up.

To calculate the gross pay with the desired net of $250, Acme must do the following:

  1. Subtract the Medicare tax rate from 1.00. The only tax that has to be withheld on a FICA-only check where the employee is over the Social Security limit is Medicare (1 - 0.0145 = 0.9855).
  2. Execute the gross-up. To get the required gross pay to yield a net of $250, divide the net by 0.9855 ($250 ÷ 0.9855 = $253.68).
  3. Check the math. To check the math, multiply the gross pay by the Medicare tax rate and subtract that result from the calculated gross pay. The Medicare tax on $253.68 is $3.68 ($253.68 × 0.0145 = $3.68 as rounded to the nearest penny). The desired net pay of $250 is determined by subtracting the Medicare tax from the gross pay ($253.68 - 3.68 = $250). If the final answer on this math check is not within a penny or two of the desired net, a mistake was probably made.

Scenario 4 - Over Additional Medicare Limit

Joe Smith will receive a net bonus of $250 from Acme Widget Corporation. The bonus must be grossed up for any applicable Social Security and Medicare taxes. Joe Smith's 2017 wages already exceed the Social Security taxable wage base of $127,200, so no Social Security tax will need to be withheld on this gross-up. However, this bonus will boost his pay for the year over $200,000, so Acme must withhold the additional 0.9% Medicare tax. Acme does not match the additional 0.9% tax. To calculate the gross pay with the desired net of $250, Acme must do the following:

  1. Subtract the additional Medicare tax rate from 1.00. The only tax that Acme must withhold on a FICA-only check where the employee is over the Social Security limit is Medicare. However, since Joe Smith's wages will now exceed $200,000, Acme must withhold Medicare taxes at a combined rate of 2.35% on the bonus and on all regular and supplemental pay he receives for the remainder of the year (1 - 0.0145 - 0.009 = 0.9765).
  2. Execute the gross-up. To get the required gross pay to yield a net of $250, divide the net by 0.9765 ($250 ÷ 0.9765 = $256.02).
  3. Check the math. To check the math, multiply the gross pay by the Medicare tax rate and subtract that result from the calculated gross pay. The overall Medicare tax on $256.02 is $6.02 ($256.02 × 0.0235 = $6.02 as rounded to the nearest penny). The desired net pay of $250 is determined by subtracting the Medicare tax from the gross pay $256.02 - $6.02= $250). If the final answer on this math check is not within a penny or two of the desired net, a mistake was probably made.