Results of a recent WorldatWork QuickQuestion survey revealed mixed practice among the 366 responding members with respect to tax gross ups for cash spot awards.
In response to the question "With cash spot awards, does your organization increase the amount of the stated award amount in order to offset the tax impact (also known as grossing up the award)?", responses were as follows:
- Sometimes, depends on the size and type of spot award - 43.7%
- Never - 33.1%
- Yes, always - 23.2%
I believe the reason why employers increase the amount of cash awards is that such awards are subject to supplemental tax withholding, that reduces the amount far more than for regular paychecks, which are withheld at much lower rates. If they were not increased to compensate, employees would be surprised and disappointed with their cash award.
The University of Illinois allows cash awards to be increased to fulfill promises to employees of a specific dollar amount, regardless of taxes.
The taxes are described below:
Award Payments
The University of Illinois allows awards to be paid to employees for outstanding service. Awards are subject to supplemental tax rates (25% federal, 3% state and 1.45% Medicare if applicable).
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AB - Great add-on clarification and information, Frank, thanks for sharing it here!
Posted by: Frank Giancola | February 21, 2007 at 12:46 PM
As someone who addresses this issue regularly I see about 50/50 split with companies on whether they gross-up the awards they issue. Typically, it is dependent on the income level - the higher, the less likely.
There are some companies that do not gross-up the award, use "debit cards" as the award vehicle, yet need to withhold the tax requirements from their weekly pay to be in compliance with the IRS. We've had participants in programs like this that earned so much in the incentive program that they received no pay in their weekly check due to the withholding to cover their incentive payout on their debit cards. Not a good situation.
I posted to my blog http://incentive-intelligence.typepad.com some resources for review relating to tax issues.
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Paul - Thanks for the additional insights and information on this issue.
Readers - Please follow the link above to some helpful resources regarding taxation on his blog, Incentive Intelligence.
Posted by: Paul Hebert | February 22, 2007 at 12:35 PM