Gross Up - The Strategic CFO®

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  • Tags: 401k, compensation, employees, gross up, human resources, income, income tax, investment
Table of contents
  1. Gross Up Definition
  2. Gross Up Explanation
    1. Example

See Also: Adjusted Gross Income Definition Gross Profit Margin Ratio Analysis PEO Arrangement Compared to Outsourcing Payroll Payroll Accounting Purchase Option

Gross Up Definition

Defined as paying a full amount without any deductions, gross up is most often used in terms of salary for employees.

Gross Up Explanation

Gross up, explained as a method for human resources to gain the benefit of their wages as soon as possible, is more simple than it appears. When salary is grossed up it is paid fully without any deductions that are not required, like 401k payments. This allows the employee to begin using their entire income as soon as possible. Though gross up wages are paid in full, deductions required by the government still occur. An employee will not be able to avoid income tax when they gross up; taxes will still need to be paid before the final amount is then given to the worker. Other payments can also receive the gross up calculation. For example, a payment for the purchase of a business can be grossed up. In this case, the receiving party will take their full amount of payment rather than having to wait some time for completion. This allows the previous owner more freedom than if some of the payment is withheld. Gross up operating expenses and other payments occur, as well.

Example

Stella works for a financial services company. Stella, an investment advisor, has a keen sense for prudent investments. Through her years of experience she has earned this skill as well as the art of negotiation. Both of these abilities have worked to her advantage. Stella is interviewing for a new job. The employer knows that Stella is well suited for the work. Stella also knows this. The interview runs smoothly as Stella continues providing answers. When it comes time to negotiate salary Stella prepares her words. She begins with the salary she deserves, which it appears her employer is ready to accept. Then Stella brings up the option of her receiving a gross up paycheck, calculator in hand, with some figures. She shows the interviewer how she can make more income while saving the company money. Her explanation is simple; she can invest her wages and receive greater gain in the long run if she is fully paid now. On the other hand, the company will only feel a slight decrease in cash holdings from this. Stella’s resume and years of experience give backing to her claims, that she can be trusted, and the validity of her gross up formula calculation. Stella completes her argument and is granted a gross up salary. She is satisfied that she has created a good situation for her and her company. She leaves the office with a smile on her face. gross up

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