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The Certified Payroll Professional Corner: Gross Ups

Christopher Wood, CPP  

· 5 minute read

Christopher Wood, CPP  

· 5 minute read

In our last edition of the Certified Payroll Professional (CPPCorner, we talked about the regular rate calculation for overtime purposes.

Regular rate of pay for overtime. The Fair Labor Standards Act (FLSA) requires that most employees in the United States be paid at least the federal minimum wage for all hours worked and overtime pay at not less than time and one-half the regular rate of pay for all hours worked over 40 hours in a workweek.

The amount of overtime pay due to an employee is based on the employee’s regular rate of pay and the number of hours worked in a workweek. Unless specifically noted, payments that are excludable from the regular rate may not be credited towards overtime compensation due under the FLSA.

Sums paid as gifts, including payments in the nature of gifts made on holidays or on other special occasions, or as a reward for service may be excluded from the regular rate, provided the amounts of the gifts (or payments) are not measured by or dependent on hours worked, production, or efficiency.

Previous question. We asked what item must be included in the regular rate of pay for the purposes of figuring the regular rate of pay for overtime purposes? The answer is “d. commissions.” The U.S. Department of Labor (DOL) has a webpage that discusses commissions. Payroll Guide ¶18,022 contains a DOL table that can be used to compute overtime on different types of pay that includes commissions.

Many overtime investigations. The DOL’s Wage and Hour Division (WHD) consistently report on investigations where the division found overtime pay violations. On June 22, 2022, a federal court ordered two San Juan, Puerto Rico restaurants and their owners to pay a total of $31,630 to 19 workers in back wages. The investigation found the employers paid some of their cooks and waiters a set salary each week regardless of how many hours they worked and required some employees to buy and maintain their uniforms, which caused minimum wage and overtime violations.

Gross ups. A gross-up is an additional amount of money added to a payment to cover the income taxes the recipient will owe on the payment. There are different scenarios in which an employer may need or want to gross up an employee’s pay. One example might be seen in executive compensation plans where a company might agree to pay an executive’s relocation expenses plus a gross up to offset the expected income taxes that will be owed on the payment.

Another example might be for a bonus an employer wants to pay all employees so the net pay of the bonus is exactly the same for each employee. A company may want to forecast year-end bonuses and see what the gross payout would be for each employee if the employer is planning to pay a flat net bonus to all employees.

Adding it all up. What can make a gross up difficult is determining the taxes and the voluntary and involuntary deductions. This may include retirement deductions and medical contributions. It could also include garnishments like child support. This can be a lot to track. Luckily, there are gross up calculators. The Checkpoint payroll product contains a number of payroll calculators, including one for gross ups.

It’s on the exam. However, the CPP exam will include a gross up calculation question. So, understanding how to correctly calculate one is important for those who are studying for the exam. In addition, there could be circumstances where a company’s payroll system is down and such calculations will need to be done manually. Or, perhaps an employer wants to double check the calculations against the calculator or payroll system.

In these cases, it will be necessary for a payroll professional to be able to manually make these calculations to determine the correct gross pay for the employees.

Basic idea of a gross up. The basic idea for calculating a gross up is to: (1) add up all federal, state, and local tax rates, (2) subtract the total tax rates from the number, (3) divide the net payment by the net percent, and (4) check the answer by calculating the gross payment to the net payment. To help understand the concept a little more, check out Payroll Guide ¶3795.

CPP exam question. For this question, try to calculate a gross up at the federal level for the following example: An employer wants to give a $500 bonus to one of its employees using the federal income tax withholding rate for bonuses. Perform a gross up to determine what the gross pay must be for this employee in order for the net pay to be $500. Determine the federal income tax withholding rate, the Social Security tax rate and the Medicare tax rate. Follow the steps above and in Payroll Guide ¶3795 to guide you through the process.

Next edition, we’ll go over the calculation and provide a more complicated example involving state tax and deductions so you can continue to practice.

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