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Gross Up Methodology (IRS Allowable)

Hi All,

I have what should be a fairly easy question, but I can't seem to reconcile the answer myself. My issue is that the IRS (for the most part) allows two methods of withholding taxes from an employee's wages. First, for regular wages, they allow the methods which are all fairly similar (wage bracket method, percentage method, and some alternate methods) all of which basically come to the same number. The other option is to withholding at the supplemental rate for supplemental wages (22% for FIT < 1M and 37% > 1M).

Now that part makes sense, but what confuses me is when employers gross up taxable expenses for an employee and gross it up at a flat amount (not the supplemental rate but an employer picked amount...say 10%). If an employer is just choosing to cover a gross up of 10% for an employee, it doesn't appear that they are complying with the withholding rules. My only thought is that gross-ups are not subject to the withholding rules as I'm understanding them.

Any help/clarification would be appreciated.

Thank you,

Chad Chester


  • Ok, I think I may have just realized the answer myself. Is this because the taxable expenses are not identified as wages under IRC, and therefore are not subject to the same withholding rules?

  • What kind of "taxable" expenses are you talking about? If this is truly taxable under IRC definitions, then both the expense and the gross up are fully taxable wages. I am not sure that you and IRS are talking about the same thing when you say "taxable expenses". IRC 3401/3402 specifically says that EVERYTHING of value the employee receives is taxable wages to the employee UNLESS formally excepted. "Expenses" per se or not necessarily excepted, and could indeed be taxable wages. All non-qualified (taxable) expenses should be paid through payroll and subject to tax withholding. Gross up is legal if done correctly but is still fully taxable wages.