The Mechanics of Payroll Tax Gross-Up Calculations
A gross-up is an additional payment added to an employee's bonus or relocation check to cover the income taxes the employee is required to pay. Without a gross-up, a promised $5,000 bonus check would arrive in the employee's bank account heavily reduced by federal, state, and payroll taxes.
Statutory Withholding Rules
- Federal Supplemental Withholding: The IRS mandates a flat 22% supplemental rate on non-periodic wages (bonuses, commissions, prizes) up to $1,000,000. Supplemental payments exceeding $1,000,000 within a calendar year are taxed at the top marginal bracket of 37%.
- FICA Wage Cap: Once an employee's cumulative year-to-date earnings exceed the Social Security wage limit ($168,600), the 6.2% Social Security tax ceases, lowering the required gross-up amount.
- State Discrepancies: In zero-income-tax states like Texas, Florida, and Washington, the employer gross-up cost is dramatically lower than in high-tax jurisdictions like California (10.23%) or New York (9.62%).