Step 1 Add up All Tax % Using Supplemental Rates

Grossing-Up Employer-Paid Taxes (PS 3.4-11)

Example 1: 123 Inc. requests its Payroll Dept to give employee Ryan a $5,000 net check in 2014. To ensure that Ryan receives $5,000, 123 Inc. agrees to pay her federal and state income and social security and Medicare taxes on the bonus, which is treated as supplemental wages. Here is how the employer would calculate the gross payment to Ryan and the amounts that must be withheld, assuming Ryan will not reach the social security wage limit with the bonus payment and that the state supplemental wage withholding rate is 6%:

Step 1 Add up all tax % using Supplemental rates

25% FIT + 6% SIT + 6.2% SS + 1.45% Med.

Total tax % = 38.65%

Step 2 Subtract Total tax % from 100%

Gross-up rate = 100% - 38.65% = 61.35%

Step 3 Divide Gross-up rate into net amount

Gross earnings = $5,000 ÷ 61.35% = $8,149.96

Step 4 Multiple each of the taxes out

FITW = 25% x $8,149.96 = $2,037.49

SITW = 6% x $8,149.96 = $489.00

SS = 6.2% x $8,149.96 = $505.30

Med. = 1.45% x $8,149.96 = $118.17

Step 5 Verify

$8,149.96 - $2,037.49 - $489.00 - $505.30 - $118.17 = $5,000

Example 1: 123 Inc. request its Payroll Dept to give employee Ryan a $5,000 net check in 2013. To ensure that Ryan receives $5,000, 123 Inc. agrees to pay her federal and state income and social security and Medicare taxes on the bonus, which is treated as supplemental wages. Here is how the employer would calculate the gross payment to Ryan and the amounts that must be withheld, assuming Ryan will not reach the social security wage limit with the bonus payment and that the state supplemental wage withholding rate is 4%:

Example 2: Assume the same facts as in Example 1, except that, at the time the bonus is paid, Ryan has already been paid $100,895.80 during 2013. State tax rate of 4%. Due to Ryan going to max out on Social Security the employer would calculate the gross payment to Ryan and the amounts that must be withheld as the following:

Step 1 Figure the max that Ryan can have deducted for Social Security

Social security wage base for 2014 = $117,000 Tax rate = 6.2%

Amount subject to SS tax = $117,000 - $113,000.00 =$4,000.00

SS tax on $4,000.00 = $4,000.00 x .062 = $248.00

Step 2 Add SS tax amount to net amount

Amount for gross-up cal = $5,000 + $248 = $5,248

Step 3 Add up all tax % using leaving out SS %

25% FITW + 4% SIT + 1.45% Med.

Total tax % = 30.45%

Step 4 Subtract Total tax % from 100%

Gross-up rate = 100% - 30.45% = 69.55%

Step 5 Divide Gross-up rate into net amount + SS amount

Gross earnings on $5248 ÷ 69.55% = $7,545.65

FITW = 25% x $7,545.65 = $1,886.41

SITW = 4% x $7,545.65 = $301.83

SS = 6.2% x $4,000.00 = $248.00

Med. = 1.45% x $7,545.65 = $109.41

$7,545.65 - $1,886.41 - $301.83 - $248.00 - $109.41 = $5,000

Example 3: Assume the same facts as in Example 1, except that Ryan should also have 10% withhold for 401K.

Step 1 Add up all tax % using Supplemental rates

25% FIT + 4% SIT + 6.2% SS + 1.45% Med. + 10% 401k

Total tax % = 46.65%

Step 2 Add FITW (25%) + SITW (4%) together then multiple 401k % by total

25% + 4% = 29% x 10% = 2.90

Note this is a negative adjustment against total taxes.

Step 3 Subtract Step 2 from Step 1

46.65% - 2.90% = 43.75%

Step 4 Subtract Step 3 from 100%

Gross-up rate = 100% - 43.75% = 56.25%

Step 3 Divide Gross-up rate into net amount

Gross earnings = $5,000 ÷ 56.25% = $8,888.89

Step 4 Multiple each of the taxes out

Note you will have two different tax amount one for Federal and State (8,888.89 – 888.89= 8,000.00) and other one for FICA (8,888.89)

FITW = 25% x $8,000.00 = $2,000.00

SITW = 4% x $8,000.00 = $320.00

SS = 6.2% x $8,888.89 = $551.11

Med. = 1.45% x $8,888.89 = $128.89

401K = 10% x 8,888.89 = $888.89

Step 5 Verify

$8,888.89- $2,000.00 - $320.00 - $551.11 - $128.89 – 888.89 = $5,000