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What is a Gross Up?

Grossing up is the action of calculating and offsetting the tax burden associated with reimbursed expenses that are deemed taxable by the IRS.

Reporting relocation expenses is one of the most complex issues for human resource professionals.  That is why many companies look to their relocation service provider to track all the expenses and submit a report during and after an employee relocation that groups or categorizes all of the relocation expenses as taxable or non-taxable.  This service can range from $300 to $1000 per employee depending on the exact services you procure. Relocation Benefits offers Expense Administration services, which is one of the first steps to calculating an employees Gross Up. 

Contact Relocation Benefits for a free consultation on handling your employees relocation gross up needs.

Calculating Gross Up

Simple Gross Up is the most preferred method for human resource professionals. However, this method does not always compensate the employee in full for the taxes incurred on reimbursed expenses.  The simple calculation is performed by deciding on a fixed gross up percentage such as the supplemental tax rate or 28%, 35% or some other arbitrary figure that the company feels it can afford. Example: $13,000 taxable expenses, multiplied by 28% gross up, equals $3,640 gross up.  This gross up of $3,640 is also taxable to the employee.  Therefore if the employee is in a 30% tax bracket, this gross up reimbursement is only worth around $2,500.

The Inverse Method is much like the simple gross up method except it has a tax-on-tax effect.  This is calculated by subtracting the tax rate from one, (1-tax rate).  Utilizing the information from the example above, the calculation would be: 1-.28=.72; $13,000 .72 = $18,055 (Gross up amount = $5055).  This method is easy to calculate, offers a tax-on-tax protection and allows for immediate reporting of taxes.  Employees that fall above or below the calculated tax rate may still have some tax liability or receive too much tax assistance.  However, this method provides a closer approximation of the true tax liability.

The True Up Method is the best method for making sure your relocating employee is not under compensated or over compensated by providing this gross up benefit.  This process is commonly performed by a CPA or by a relocation management company.  A gross up calculation is performed at the time the expense occurs and again at the end of the year prior to reporting wages on the employees W-2.  This year-end true up method may require you to make a negative adjustment based on the employee's filing status and overall income.

Contact Relocation Benefits to find out more about our Expense Administration services.

 

Last modified: 12/28/10