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- 1 Calculate Federal & State Taxes for Gross-Up Purposes
- 2 Calculate the Tax Rate on Employee Bonuses
- 3 Why Are Bonuses Taxed So High?
- 4 Figure Gross Pay if Employer Pays FICA
As an employer, you sometimes make extra payments to employees, such as bonuses or reimbursements for mileage or moving. The Internal Revenue Service doesn't require you to pay taxes on mileage reimbursements, but it does tax bonuses and moving reimbursements. Grossing up is the practice of paying employees for the extra tax they'll owe. It's an considerate step you can take as an employer to show your employees that you value them, and to save them the disappointment of receiving less money than they're expecting.
Grossing Up by Ballpark Percentage
A simple way to gross up a taxable reimbursement is to add an additional payment to the agreed upon amount, such as 25 percent of the original sum. This extra payment won't be an exact reimbursement for the taxes that will be owed, but even if it falls short it will certainly help to ease the burden.
Grossing Up by the Supplemental Inverse Method
To gross up to a more accurate and relevant number, calculate the actual taxes that would be taken out of the reimbursement amount if it were a regular payroll cost, and then add this amount to the reimbursement.
- Add together the percentages you'd take out of pay for Social Security, Medicare and federal income taxes, as well as percentages for any state taxes you're required to withhold. The total of these percentages is the employee's total tax rate.
- Subtract this total tax rate from the number 1 to calculate the net percent, or the percentage your employee gets to keep out of gross paycheck amounts.
- Calculate net pay by multiplying the net percent by the gross paycheck amount.
- Divide net pay by net percent to calculate the amount to add to the gross pay. This will give you the grossed up total.
Tax-Time Reconciliation
At the point in the year when you pay employees for moving expenses or bonuses, you're unlikely to know the precise amount that these payments will affect their annual tax liabilities. Federal income tax forms aren't due until April 15, months after the end of the year when the moving expense reimbursement payment or bonus is made. Each individual's tax burden ultimately depends on a list of variables other than the reimbursement or bonus that you're paying.
Make sure employees understand that even if you've used the supplemental inverse method, the gross up amount is still an approximation, just as the amounts you withhold from regular paychecks are approximations. The actual amounts owed will be determined once all the information on the employee's tax form is compiled.
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About the Author
Devra Gartenstein founded her first food business in 1987. In 2013 she transformed her most recent venture, a farmers market concession and catering company, into a worker-owned cooperative. She does one-on-one mentoring and consulting focused on entrepreneurship and practical business skills.
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