Every industry has its unique vocabulary that people on the outside do not understand. This includes the payroll industry. Payroll service providers like Dallas-based BenefitMall use a whole host of vocabulary terms that are completely foreign to anyone who does not have a firm grasp of payroll processing. A good example is the term ‘grossing up’.
You may think this term has a negative connotation given your experience with small children or pets, but relax, there is nothing disgusting about it. Grossing up wages is simply the act of increasing how much you pay an employee in order to guarantee that person receives a certain amount of take-home pay.
Let’s say you promise an employee a $500 bonus for performing especially well on a given task. If you were to simply cut a $500 check, you would have to deduct federal and state taxes, FICA, and contributions to any benefits programs the employee participates in. That $500 could end up being $400 or less in take-home pay.
Grossing up ensures the promised take-home pay by increasing pretax earnings (gross) to cover all the taxes and deductions that will be applied. If this seems like it could be complicated, your intuition is correct. Grossing up can be very complicated, depending on tax jurisdiction.
Why Companies Gross Up
More often than not, grossing up applies to one-time payments like annual bonuses and commissions. It is possible to gross up regular weekly pay, but doing so is rare. It is just too complicated in most cases to make grossing up practical on an ongoing basis.
Having said that, the most common reason for grossing up is to guarantee that employees eligible for bonus pay actually receive what they were promised as take-home pay. Otherwise, employees can be dispirited by receiving less after deductions are applied.
The Easy Gross Up Formula
Payroll pros know a quick and easy formula for determining gross up wages that returns an accurate number every time. Here is a brief description of the formula:
- Add up all the applicable deductions to come up with a total percentage – expressed as a decimal.
- Subtract the total percentage from 1 (e.g.; 1 – 0.025 = 0.75).
- Divide the promised net amount by the number resulting from the previous step (e.g., $500 divided by 0.75).
- The resulting number is the gross amount that will, after all deductions, result in take-home pay of $500.
The only caveat to this formula has to do with federal income taxes. If the amount of bonus pay that a company is paying an employee pushes that employee into a higher tax bracket, the higher federal income tax would have to be accounted for in the formula. In states that also have progressive tax rates, additional adjustments may have to be made.
Getting the Most from Your Payroll
Now that you know what grossed up wages are, it’s time to step back and ask yourself if your company is currently making the most of payroll processing. In other words, how long does it take your HR department to process payroll? How much labor is it costing you as well? A proper analysis of your current processes and procedures might reveal that your company would be better off with a payroll service provider like BenefitMall.
Not only can BenefitMall handle grossed up wages, but they can also handle everything else related to payroll and benefits administration. And when you and your HR department do not have payroll processing to worry about, you will all have more time to invest in those tasks truly deserving of your attention.