In everyday payroll transactions, you typically would start from an employee's gross pay, then subtract taxes and deductions until you get down to the net pay, which is what the employee receives on check date. "Grossing up" is a term that we use when an to describe calculating backwards: starting from the net pay and working up to the gross.
The most common scenarios in which an employer chooses to gross up an employee's pay tend to be related to fringe benefits reporting and bonus payments. Basically, grossing up is a method used when you (the employer) want to be extra generous to the employee and not only provide the cash benefit but cover their portion of the taxes on that benefit as well.
For iSolved users, using the additional check type "Gross Up" when adding your payments will do this calculation automatically. The tax rates that automatically calculate will be based on the employees' normal withholding frequency/exemptions.
If you desire a specific set of tax rates for your bonuses and/or fringe benefits, submit a request to DP Customer Service via the Support widget at the bottom right, and we will customize an additional check type to fit your needs.
To manually calculate a gross-up, you would need to know the following information:
- Desired net pay (or fringe benefit value),
- Desired withholding tax rate,
- and the applicable FICA and medicare tax rates.
Once you've established those parameters, add all of the tax rates together. To use the supplemental tax rates for Virginia employers as an example (and assuming the employee has made less than the FICA limit in the year), it'd end up being:
- FICA = .062
- Medicare = .0145
- Fed Withholding = .25
- Virgina Withholding = .0575
- Total tax rate = .384 (38.4%)
Next, subtract the tax rate from 1. In this case, 1 - .384 = .616. Then, divide your desired net by the resulting number to get the gross up!
The formula works out to Gross Pay = Net Pay/(1 - Total Tax Rate).