When you get a bonus at work, you’re supposed to pay taxes on it. You automatically lose a good chunk of that bonus, making it a little less useful than your employer intended. In light of this fact, some employers gross up pay. If your employer grosses up your pay, she adds enough money to your check to cover the taxes on your bonus. The bonus isn’t (officially) any bigger, but you no longer have to worry about paying the taxes on it. In reality, however, your bonus really is bigger and you’re still paying the same percentage of taxes.
I’ve never tried to convince an employer to gross up a bonus for me. But I try pretty hard to think about my checks in terms of the fact that I only get to use about half of the money I’m supposedly getting.
Grossing up has a poor reputation these days, making it less appealing. Many CEOs have taken advantage of grossing up to get their companies to pay the taxes on bonuses and severance packages. Don’t Mess With Taxes has a great post on the subject.
While I’m not a huge fan of grossing up, I think that there’s some value in thinking about our standard paychecks in terms of grossing up. What are we really getting? The amount beyond that number is really just grossing up our pay to cover the taxes on that real amount. It’s pretty easy to get an inflated sense of our incomes when we don’t take taxes into account, but if we think about half of our income as grossing up our pay, we get a better picture of what’s going on.