We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

What is a Tax Gross-Up?

By Toni Henthorn
Updated May 16, 2024
Our promise to you
SmartCapitalMind is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At SmartCapitalMind, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject-matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

A tax gross-up or simply, gross-up, is compensation paid to an employee, in addition to his salary, to cover the tax liability for perquisites, or "perks." Perquisites may include the use of a corporate car or aircraft, relocation expenses, leases, memberships, and insurance. Because the Internal Revenue Service (IRS) views perquisites as other income, employees who receive perks must pay taxes on the fair market value of the goods or services received.

Of large United States companies, roughly 77 percent offer tax gross-ups or tax reimbursements. For example, in 2004, Home Depot gave outgoing chief executive officer Robert Nardelli an extra $3.3 million US Dollars (USD)to take care of his personal taxes on various perquisites. In Nardelli's case these included forgiveness of a personal debt and family travel on the corporate jet.

Begun in the 1980s, tax gross-ups grew after the United States Congress imposed a 20 percent excise tax, on top of regular income tax, on severance packages of executives who merged or sold their companies. The excise tax applies when the severance exceeds an amount that is triple the executive's median earnings over the past five years. Standard severance packages are typically three times the salary and bonus, and restricted stock and outstanding options vest immediately, making the potential tax bill extremely expensive. Companies can end up paying millions in gross-up taxes to the IRS to provide employees only a few hundred thousand dollars in additional severance. A tax gross-up can be the most costly part of a golden parachute for the company.

Supporters of tax gross-ups argue that the tax reimbursement is an effective mechanism for recruiting, hiring, and retaining experienced executives. Another advantage is that executives are able to hold larger equity stakes in their companies if they do not have to pay taxes on restricted stock. Executives who have increased equity will most likely align their management goals with that of shareholders. Opponents of tax gross-ups suggest that companies use the tool to beef up executive compensation while concealing this fact from shareholders. An expensive tax gross-up can be an inefficient use of shareholder money.

Prior to 2006, perquisites had to be included in the Summary Compensation Table of the annual proxy statement only if the total perquisite value exceeded 10 percent of the employee's total annual salary and bonus or $50,000 USD. Furthermore, specific details of a tax gross-up, or any other perk, had to be delineated in a separate summary only if it exceeded 25 percent of the total perks for that employee. After the financial catastrophes of Tyco, WorldCom, and Enron, the SEC issued new regulations, "Executive Compensation and Related Party Disclosure," which applied to proxy statements submitted after 15 December 2006. The threshold for disclosure dropped from $50,000 USD to $10,000 USD for the aggregate perquisites with detailed disclosure required for any perk that exceeds $25,000 USD or makes up 10 percent of the total perks for an employee.

Using data from proxy statements of Fortune 500 companies, the tax gross-up is the most widely used perquisite. From proxy statements pertaining to 2006, 755 executives accepted tax gross-ups, with the median gross-up approximately $34,000 USD. Although the tax reimbursement is the most commonly employed perk, it is not the most exorbitant. For example, during 2006, Fortune 500 companies provided airplane or corporate jet use as a benefit to 432 executives, with an average perk value of $82,203 USD. Nonetheless, shareholder and media criticism over excessive executive pay packages, including bonuses and perks, has made the implementation of tax gross-ups a controversial issue.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Discussion Comments
By anon294746 — On Oct 03, 2012

I have queries on tax perquisites for cars. I see the perquisite value is 2700/month for a 1600cc chauffeur driven car owned by the employee. In my company they said I have a pro rated eligibility of 60,000 (fuel), 60,000 (driver) and maintenance of 34,000. So what do these amounts mean and what is a 2,700 perquisite?

Does it mean that, if I use the benefit up to 60,000, say for fuel, then 21,600 will be added to my taxable income instead of 60,000? What if I am submitting a bill of 21,600? Then is it going to be nil. How is it calculated? What does perquisite getting added to taxable income mean? Please clarify.

By Mark Caplan — On Oct 14, 2010

Do some Fortune 500 corporations pay tax gross-ups on the regular salary paid to executives, or only on perks and severance packages? Why not on the regular salary too?

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.