Best Practice: Configuring Payroll to calculate gross-up pay

If you want an employee's pay to net to a certain amount, you need to ensure that the taxable amount is high enough to cover the taxes that are withheld. The method for doing this is called "grossing up" the pay. Gross-up pay is sometimes used for bonus checks.

Expand this link to learn how the formula for gross-up is derived.

Basic formula

[Desired Net Pay] = [Gross-up] - ([Gross-up]*[USA supplemental rate] + [Gross-up]*[State supplemental rate] + [Gross-up]*[Social Security rate] + [Gross-up]*[Medicare rate])

Solving for the gross-up amount yields:

[Gross-up] = [Desired Net Pay] / (1 - ([USA supplemental rate] + [State supplemental rate] + [Social Security rate] + [Medicare rate]))

Formula when initial gross-up plus year-to-date Social Security exceeds the Social Security cut-off

In this formula, A is the amount that the previous gross-up plus Social Security wages is below the Social Security cut-off. If already over the Social Security cut-off, A = 0.

[Desired Net Pay] = [Gross-up] - ([Gross-up]*[USA supplemental rate] + [Gross-up]*[State supplemental rate] + [A]*[Social Security rate] + [Gross-up]*[Medicare rate])

Solving for the gross-up amount yields:

[Gross-up] = ([Desired Net Pay] + [A]*[Social Security rate]) / (1 - ([USA supplemental rate] + [State supplemental rate] + [Medicare rate]))

Formula when gross-up plus year-to-date Medicare wages exceeds the Medicare threshold

In this formula, O represents the amount that the previous gross-up plus year-to-date Medicare wages exceeds the Medicare threshold.

[Desired Net Pay] = [Gross-up] - ([Gross-up]*[USA supplemental rate] + [Gross-up]*[State supplemental rate] + [A]*[Social Security rate] + [Gross-up]*[Medicare rate] + [O]*[Additional Medicare rate])

Solving for the gross-up amount yields:

[Gross-up] = ([Desired Net Pay] + [A]*[Social Security rate] + [O]*[Additional Medicare rate]) / (1 - ([USA supplemental rate] + [State supplemental rate] + [Medicare rate]))

Requirements

All applicable taxes must be included in the gross-up pay.
The social security cutoff should be honored.

Limitations of this method

This method only works for a known withholding rate such as the USA 22% supplemental rate.
Pay that is not subject to standard taxes should have another PRCode for Tax.GrossUp that only includes the applicable taxes.

AccountingWare's recommendations

Create two groups: GrossUpAmt that contains the PRCode Pay.GrossUp and GrossUpTax that contains Tax.GrossUp.
Create two PRCodes: Pay.GrossUp that allows the desired net pay to be entered and Tax.GrossUp that is an employer tax type to calculate the additional pay needed to cover the tax.

Sample Pay.GrossUp

Note

Checks or time sheets that use Pay.GrossUp should also include Tax.GrossUp.

Sample Tax.GrossUp

Note

Checks or time sheets that use Tax.GrossUp should also include Pay.GrossUp.

Note

The example above does not include state tax. If you have a state tax, the Rate and Result expressions would need to be extended accordingly.

Sample check lines

Notes

The check lines above do not include state tax. If you have a state tax, include the appropriate PRCode(s).
Due to rounding issues, the net pay amount and gross-up amount may differ by a few cents. To resolve this, unlock the Result column for the Tax.USA PRCode and adjust the result amount up or down as needed.

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