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.
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.”