What are the different methods of calculating gross-up?

 

What are the different methods of calculating gross-up?

Calculating gross-up can be a mystery. Plus’s Director of Finance, Angela Sieber, will de-mystify the rates and methods that go into calculating gross-up.

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Complete transcript: “Hi, I’m Angela Sieber, Director of Finance here at Plus Relocation Services and welcome to Relo Tip Tuesday.  My question was, ‘What are the different methods of gross-up?’

In order to answer that question, we really need to understand what makes up a gross-up.  There’s two parts: a rate and a method.  So first let’s look at the rates.  There are three different rates. One it could be a fixed rate which companies would just choose.  For example, forty percent.  The second one is supplemental and those are the government rates for supplemental ranges.  There is a federal and then each state has a supplemental rate as well.  And the last one is marginal and that is based on the employee’s salary and what tax bracket they fall into.

Now let’s take a look at the methods.  There is a flat method which is essentially a one-time gross-up where the formula is taxable expenses times the sum of the tax rates equals your gross-up.  The next is the inverse method which is a little bit more complicated.  It takes into consideration that the gross-up is also considered taxable and takes that into account.  So the formula is taxable expenses divided by one minus the sum of the tax rates equals your gross-up plus your expense.  So let’s rewind and do that again.  It’s taxable expenses divided by one minus the sum of the tax rates equals your gross-up plus your expenses.

So once you have your rate and your method you can make any combination really.  You could have a flat fixed gross-up as an example, you could have an inverse marginal or any combination thereof. So that is how you determine different gross-up methods.”

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