Why employers gross up
Withholding means a $500 bonus never arrives as $500. When the promise was a round net figure, such as a gift card value, a relocation payment or a holiday bonus, the employer pays the tax on top so the employee is not short. The extra tax money is itself wages, so it is taxed too, and the formula has to account for that.
Publication 15 (2026) says the same about another kind of gross-up: when an employer pays an employee's share of social security and Medicare instead of withholding it, the payment is added to wages and taxed. Household and agricultural employers get an exception, with the amount reported in W-2 box 1 but not in boxes 3 and 5.
The formula is gross = net ÷ (1 − total rate). Total rate is every percentage withheld on the payment: federal, social security, Medicare, and state and local tax where they apply.
Grossing up a $500 bonus
The bonus is paid separately and withheld at the 22% supplemental rate. With social security at 6.2% and Medicare at 1.45%, the total rate is 29.65%. $500 ÷ 0.7035 = $710.732. At $710.73 the three taxes, each rounded to the cent, leave $499.99, so the gross goes up one cent to $710.74.
| Line | Rate | Amount |
|---|---|---|
| Gross bonus | $710.74 | |
| Federal income tax | 22% | −$156.36 |
| Social security | 6.2% | −$44.07 |
| Medicare | 1.45% | −$10.31 |
| Net to employee | $500.00 |
In a state with income tax, add its rate to the 29.65% before dividing. Once the employee has passed the 2026 social security wage base of $184,500, leave the 6.2% out.
What the stub shows
The stub shows the grossed-up amount, $710.74, on the earnings line, never the $500 target. Each tax is then listed at its real amount, and net pay comes out at the promised figure. Writing $500 as the earnings line would understate wages on the stub, in the payroll record and later on the W-2.
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Related terms
Questions
What is the gross-up formula?
Gross equals net divided by one minus the total withholding rate. For a net of $1,000 with 29.65% withheld, $1,000 ÷ 0.7035 = $1,421.46 to the cent. Then check it: round each tax to the cent and confirm the net is still exactly the target.
Is a gross-up taxable income?
Yes. The whole grossed-up amount is wages, including the part that covers the tax. It goes into W-2 boxes 1, 3 and 5 like any other pay, apart from the household and agricultural exception for employer-paid FICA.
Can I gross up a regular paycheck?
Yes, but regular wages are withheld from the W-4 and Publication 15-T tables rather than a flat rate, so the answer shifts with the amount. Run the calculation, check it, and adjust by a cent or two.
Sources
- IRS: Publication 15 (2026), Employer's Tax Guide (read October 8, 2026)
Figures are for the 2026 tax year unless the text says otherwise. This page explains a payroll term; it is general information, not tax or legal advice.