Gross-up

Gross Up Meaning

 

“Gross up” is a term used in finance to refer to adding taxes or other deductions to the net amount (such as a salary, income, or expense) so that it remains the same after the deductions.

 

For instance, if a worker receives a net wage of $70,000 and the tax rate is 30%, then the gross wage must be “grossed up” so that, after taxes, they still get $70,000.

 

The gross salary would be calculated as follows:

 

Gross Salary= Net Salary/1−Tax Rate

 

In this case, the gross salary would be:

 

Gross Salary= 70,000/1−0.30=100,000

 

The employee must earn $100,000 in gross pay to receive $70,000 in net income after taxes. This concept is used to determine the net amount that someone should receive after taxes and other withholdings.

 

How to Gross Up Social Security Income?

 

You adjust your income to reflect the amount it would have been had it not been partially or completely non-taxable. It is often done to determine eligibility for loans or certain benefits. Grossing up can be used when some or all Social Security income is not subject to federal income tax. Lenders or other evaluators may still want to take into account the pre-tax equivalent.

 

Steps to Gross Up Social Security Income:

 

Determine the Non-Taxable Portion:

 

• You must first determine the amount of Social Security income that is not taxable. Depending on their income total and filing status, most people could be taxed on up to 85% of their Social Security benefits.

 

Determine the Tax Rate:

 

• Determine the effective tax rate for this income if it is fully taxable. This is usually the tax bracket in which the individual falls.

 

Calculate the Grossed-Up Amount:

 

• Dividing the Social Security Income by the tax rate minus 1 is the answer to
• To gross up for a lending institution that specifies a percentage of gross-up (such as 25%), you multiply the nontaxable portion by this percentage.

 

Example Calculation:

 

• Social Security Income: $20,000 annually
• Taxable Portion: 50% of $20,000 is non-taxable
• Non-Taxable Amount: $10,000
• Tax Rate: Assume 25%

 

To gross up the $10,000:

 

Grossed-Up Amount= Non-Taxable Amount/1−Tax Rate

 

Grossed-Up Amount= 10,000/1−0.25=13,333.33

 

The gross-up amount for the non-taxable Social Security Income would be $13,333.33.

 

Important Considerations:

 

• Lender policies: Check the lender’s guidelines when grossing up Social Security Income for loan applications. They might have a preferred standard grossing-up percentage (like 15% to 25%).
• Accuracy: Be accurate and consistent when using tax rates or percentages in your calculations.

 

How Do You Gross Up a Bonus?

 

Divide the desired bonus amount by 1-tax-rate1 – texttax-rate1-tax-rate. This calculation will ensure that the net amount equals the desired bonus after taxes are deducted.

 

Example:

 

If you want a $5,000 net bonus and the tax rate is 30%:

 

Grossed-Up Bonus=5,0001−0.30=5,0000.70=7,142.86

 

The gross bonus should be $7,142.86, resulting in a $5,000 net bonus.

 

How to Calculate Gross-Up?

 

Divide the desired net amount (texttax-rate1-tax-rate) by 1-tax-rate1. The amount is adjusted so that it equals the target amount after taxes.

 

Formula:

 

Grossed-Up Amount=Net Amount/1−Tax Rate

 

Example:

 

For a $1,000 net amount with a 25% tax rate:

 

Grossed-Up Amount=1,0001−0.25=1,0000.75=1,333.33

 

So, you need $1,333.33 before taxes to end up with $1,000 after taxes.

 

Also See: Gross Pay | Gross Misconduct