Q:

What is a "Tax Gross Up?"?

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Quick Answer

The term "Tax Gross Up" refers to the practice by employers of reimbursing an employee for taxes paid out of pocket when receiving money allocated for expenses such as relocation costs. For example, if an employee is promised a lump sum of $7,000 to move, then a payment will be issued for the initial sum plus the taxes levied by the IRS, honoring the agreed upon sum, as stated by Investopedia. While this practice is solid in theory, it still leaves a problem as in addition to the tax applied to the original sum, the gross up itself is subject to taxes.

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Full Answer

In order to compensate for the taxes an employee will pay, three methods are used: the simple method, the inverse method and the true up method.

The simple method reimburses an individual for a set percentage of the tax to be paid, leaving them to pay any additional mark-up for the tax gross up, coming close to leaving them the amount given for expenses. The inverse method takes into account the increased tax on the gross up, giving the employee the advantage in the case that a lower tax rate is charged. Both of these practices are done when the payment is issued.

The true up method comprises two parts, with the first being a gross up calculation performed by a certified public accountant when the expense occurs. Then it is calculated again at the year's end, and any adjustments for the employee or the employer are reflected on the gross income of the employee as reported to the IRS, according to Relocation Benefits.

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