A gross-up calculation finds the payment amount that leaves a specific dollar figure in the recipient’s hand after taxes. The formula is one division: gross payment = net payment ÷ (1 − combined tax rate). Add every applicable tax rate, subtract the total from 1, and divide the desired net by the result. Because the tax the employer pays is itself taxable, the division is what accounts for the tax-on-tax loop; multiplying the net by one plus the rate will always undershoot.
The Formula With a Worked Example
Suppose a company wants an employee to net $5,000 from a bonus. The employee works in a state with no income tax, has not hit the Social Security wage base, and earns under $200,000. The applicable withholding rates stack like this:
- Federal supplemental: 22.00%
- Social Security: 6.20%
- Medicare: 1.45%
- Combined rate: 29.65%
Convert 29.65 percent to 0.2965 and subtract from 1 to get 0.7035. Divide $5,000 by 0.7035. The gross payment is $7,107.32. The employer withholds $2,107.32 in taxes, and the employee walks away with exactly $5,000.
Add a state with a 5 percent supplemental rate, and the combined rate climbs to 34.65 percent. The same $5,000 net now requires a gross of $7,651.11 ($5,000 ÷ 0.6535). State taxes alone add more than $500 to the employer’s cost.
The Rates You Need for 2026
Getting even one rate wrong throws off the entire result, so this step matters more than the arithmetic.
Federal Supplemental Withholding
The IRS treats bonuses, relocation reimbursements, and similar lump-sum payments as supplemental wages. For supplemental wages under $1 million in a calendar year, the flat federal withholding rate is 22 percent. Every dollar of supplemental wages above $1 million to a single employee is withheld at 37 percent.1Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide
Social Security and Medicare
Social Security tax is 6.2 percent on wages up to the annual wage base, which is $184,500 for 2026.2Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates Once year-to-date earnings pass that ceiling, the 6.2 percent drops out of the gross-up formula entirely. Medicare tax of 1.45 percent has no wage base limit and applies to every dollar.3Office of the Law Revision Counsel. 26 USC 3101 – Rate of Tax
A third payroll tax is easy to miss. The Additional Medicare Tax of 0.9 percent applies to wages above $200,000 for single filers and $250,000 for married filing jointly.3Office of the Law Revision Counsel. 26 USC 3101 – Rate of Tax The employer does not match it. If year-to-date wages already exceed $200,000 before the grossed-up payment, fold the 0.9 percent into the combined rate.
State and Local
State supplemental withholding rates range from roughly 5 percent to nearly 12 percent depending on the jurisdiction. Some states use a flat supplemental rate similar to the federal approach; others require withholding based on the employee’s estimated annual income. A handful have no income tax at all. Check the work-state revenue department for the exact figure.
When a Payment Crosses a Threshold
The single-division formula works when every rate stays constant across the full payment. When the payment itself pushes the recipient past a wage base or bracket, the calculation has to be split.
The most common wrinkle is the Social Security wage base. If an employee has earned $170,000 year-to-date and receives a grossed-up payment that lifts total wages past $184,500, the 6.2 percent Social Security tax only applies to the first $14,500 of the payment.2Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates The portion above the wage base carries a lower combined rate. In practice, split the payment into two pieces and gross up each at its own rate.
The same split applies when supplemental wages cross $1 million in the year. Everything up to that line is withheld at 22 percent; everything above it at 37 percent.1Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide A CEO receiving a $2 million grossed-up bonus needs the first million and the second million grossed up separately. The Additional Medicare Tax threshold at $200,000 can add yet another breakpoint. This is where spreadsheets and payroll software earn their keep.
Why Withholding May Not Cover the Full Tax
The 22 percent federal supplemental figure is a withholding rate, not the employee’s actual income tax rate. An employee in the 32 percent marginal bracket has only 22 percent withheld on a grossed-up bonus and owes the remaining 10 percent at filing time. The gross-up covered the withholding, not necessarily the full liability.
The reverse can happen too. An employee in the 12 percent bracket has 22 percent withheld and gets the excess back as a refund. Either way, the employee’s actual tax picture at filing may differ from what the gross-up assumed.
Some employers address this by using the employee’s estimated marginal rate instead of the flat 22 percent when calculating the gross-up. That approach is more generous and more complicated, because marginal rates depend on total annual income, filing status, deductions, and credits the employer may not know precisely. A standard gross-up guarantees the correct net at the moment of payment based on withholding rates. It does not guarantee zero balance due at tax time.
The Gross-Up Amount Is Itself Taxable Wages
When an employer pays taxes on your behalf, the IRS treats that payment as additional wages. If you receive a $5,000 net bonus and the employer pays $2,107 in taxes for you, your W-2 shows $7,107 for that payment, not $5,000.4Internal Revenue Service. Publication 15-B (2026), Employer’s Tax Guide to Fringe Benefits That is why the formula divides rather than adds. Manually, you would calculate tax on the original amount, then tax on that tax, then tax on that new amount, in an infinite series that converges on the same figure the division produces in one step.
For reporting, the full grossed-up amount, not the net, goes on Form W-2 as wages. For non-employees, the gross figure goes on Form 1099-NEC. The IRS has no special box for grossed-up payments; the total simply joins the rest of the recipient’s compensation for the year.
Contractors Are a Different Calculation
For independent contractors receiving 1099-NEC payments, the payer does not withhold FICA taxes because the contractor handles self-employment tax on their own. A gross-up for a contractor typically only needs to cover federal and state income tax. Some agreements also absorb the contractor’s self-employment tax of 15.3 percent, which is 12.4 percent Social Security plus 2.9 percent Medicare, applied to 92.35 percent of net earnings. Contracts should spell out which taxes the payer is covering, because the combined rate you plug into the formula depends entirely on that answer.