Gross-up is an accounting term used to describe a payment wherein an extra amount is added to cover the recipient’s income taxes. This additional payment is often seen in the context of a one-time payment, such as a bonus or a relocation allowance. In these cases, for the recipient to receive the desired amount of money, a gross-up has to be added in order to cover the tax liability, ensuring the employee’s net payment is equal to the desired gross payment.

For example, if a company pays an employee a bonus of $3000, they assume that the employee’s reasonable tax rate on the bonus would be 20%. To cover this tax, the gross-up payment would be an additional $600 added to the bonus to ensure that - after the employee has paid their taxes - the employee will net the desired $3000 bonus.

Gross-up is most commonly used when providing a bonus or other one-time payments. However, it can also be used to "game" executive compensation. Executives may structure their bonus or compensation in a way that minimizes their effective tax rate or allows them to take advantage of certain tax loopholes, resulting in them paying a lower rate than other employees.

Regulation on the practice of gross-up is patchy, and several companies have recently made headlines for employing controversial gross-up tactics. In some cases, these tactics have pushed the boundaries of what is considered reasonable compensation, resulting in class-action lawsuits against involved companies. As such, it is important for employers to understand the local law and regulations surrounding gross-up payments, as well as being aware of potential public scrutiny of the decision.

Overall, gross-up is an important accounting tool used to ensure those receiving one-time payments, such as bonuses and reimbursements, are able to net their desired payment while still paying taxes owed to their respective jurisdictions. However, it is important to understand the local laws and regulations to avoid potential issues, such as negative public opinion or lawsuit.