Bonuses are often given to employees for outstanding performance, as a means of sharing the company’s profits, or as an incentive to continue performing good work. In some cases, the employer may want the employee to receive a net amount after taxes, so the net amount must be grossed up to cover the necessary taxes.
On the other hand, an employer may find it necessary to gross up the value of a fringe benefit because the employee does not have any income from which to deduct the taxes on the fringe benefit. This is particularly true in the case of a former employee who was covered by a group term life insurance policy, and a portion of the value of the coverage is taxable.
The primary point to remember is this: The employee is always responsible for the taxes on his compensation, regardless of the form in which it is received. Although it may appear that the employer is covering the taxes, the taxes still have to be collected from the employee. This article will focus on the two scenarios above because they will provide examples of how income may be grossed up in almost every case.