To calculate a tax gross-up, divide the net amount you want the employee to receive by one minus the combined withholding rate expressed as a decimal. The result is the gross wage you enter in payroll so that, after every applicable tax comes out, the employee’s take-home lands exactly on the promised number. The formula handles the “tax on tax” problem automatically as long as you use a single combined rate.
Here is the formula in its plain form:
Gross Payment = Net Payment ÷ (1 − Total Tax Rate)
Everything else is knowing which rates belong in “Total Tax Rate” for the employee in front of you.
Rates You Need Before You Start
Miss a rate and the employee’s check comes up short. Four categories usually apply.
Federal Income Tax on Supplemental Wages
The IRS allows a flat 22 percent withholding on supplemental wages such as bonuses, commissions, severance, awards, retroactive pay, taxable fringe benefits, and nondeductible moving expenses, as long as the employee has not received more than $1 million in supplemental wages during the calendar year.1Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide Above $1 million in cumulative supplemental wages, the mandatory rate on the excess is 37 percent.2Internal Revenue Service. Publication 15 – Employer’s Tax Guide
Social Security and Medicare
The employee’s Social Security rate is 6.2 percent and the Medicare rate is 1.45 percent.3Internal Revenue Service. Topic no. 751, Social Security and Medicare Withholding Rates Social Security only applies to wages up to the annual base of $184,500 for 2026.4Social Security Administration. Contribution and Benefit Base If year-to-date wages have already passed the base, drop the 6.2 percent out of the combined rate. Medicare has no cap.
Additional Medicare Tax
Employers must withhold an extra 0.9 percent once an employee’s wages exceed $200,000 in a calendar year.3Internal Revenue Service. Topic no. 751, Social Security and Medicare Withholding Rates Above that line, use 2.35 percent for the Medicare piece instead of 1.45 percent. Quick calculators often skip this, and it matters for executives and highly compensated employees.
State and Local Withholding
State rules vary. Some states publish a flat supplemental rate, some require withholding at the employee’s regular rate, and some have no income tax at all. Local taxes may layer on top. Look up the specific rate for the employee’s work location. The example below uses 5 percent for illustration; substitute the rate that actually applies.
A Worked Example
Say you want an employee to net exactly $5,000 on a bonus. The employee is under the Social Security wage base for the year, earns less than $200,000, and works in a state that withholds a flat 5 percent on supplemental wages.
Add the rates:
- Federal supplemental: 22.00%
- Social Security: 6.20%
- Medicare: 1.45%
- State: 5.00%
Combined rate: 34.65 percent.
Convert and subtract from 1: 1.00 − 0.3465 = 0.6535. That 0.6535 is the share of each gross dollar the employee keeps.
Divide the net by that number: $5,000 ÷ 0.6535 = $7,651.11. That is the gross bonus to enter in payroll.
Verify. Multiply the gross by the combined rate: $7,651.11 × 0.3465 = $2,651.11 in withholdings. Subtract from the gross: $7,651.11 − $2,651.11 = $5,000.00. If rounding leaves the result a penny off the target, nudge the gross by a cent so the net lands exactly.
When the Federal Rate Jumps to 37 Percent
Once cumulative supplemental wages for the year cross $1 million, federal withholding on the excess is mandated at 37 percent.2Internal Revenue Service. Publication 15 – Employer’s Tax Guide At that income level Social Security is almost certainly maxed out, so it drops out of the formula, but Medicare stays and the 0.9 percent Additional Medicare Tax almost certainly applies.3Internal Revenue Service. Topic no. 751, Social Security and Medicare Withholding Rates
Using 37 percent federal, 1.45 percent Medicare, and 5 percent state, the combined rate is 43.45 percent and the retention factor is 0.5655. A $5,000 net bonus in this bracket requires a gross of $8,841.73, roughly $1,190 more than the same net bonus at 22 percent. Adding the 0.9 percent Additional Medicare Tax pushes the combined rate to 44.35 percent and the gross higher still. On large retention packages the difference runs into six figures.
What the Gross-Up Actually Costs the Employer
The grossed-up wage is not the whole expense. The employer owes its own FICA match on the full gross: 6.2 percent Social Security up to the $184,500 base and 1.45 percent Medicare with no cap.3Internal Revenue Service. Topic no. 751, Social Security and Medicare Withholding Rates There is no employer match on the 0.9 percent Additional Medicare Tax.
FUTA can also apply. The rate is 6.0 percent on the first $7,000 of wages per employee per year, and most employers get a credit of up to 5.4 percent, bringing the effective rate to 0.6 percent.5Internal Revenue Service. Form 940, Employers Annual Federal Unemployment (FUTA) Tax Return – Filing and Deposit Requirements If the employee has already earned more than $7,000 that year, FUTA adds nothing. On a signing bonus paid early in the year, it might.
In the $7,651.11 example, and assuming the employee is under the Social Security base, the employer’s added FICA cost is roughly $585, made up of about $474.37 in Social Security and $110.94 in Medicare. The true cost of putting $5,000 in the employee’s pocket is closer to $8,236. Budget accordingly before you promise anyone a specific net.
How the Payment Shows Up on the W-2
The full grossed-up figure, not the net, is taxable wages on the employee’s Form W-2, along with the corresponding federal and state withholdings.6Internal Revenue Service. General Instructions for Forms W-2 and W-3 In the running example, the W-2 reflects $7,651.11 in wages for the bonus. Because the withholdings were built to cover the liability, the employee generally owes no additional tax on it at filing time. The higher reported income can still affect eligibility for income-based credits and deductions, so an employee receiving a substantial gross-up should factor the reported amount into their annual planning.