Allowances, reimbursements or payments made by an employer increase an assignee's taxable income. Employers may alleviate this impact by paying the employee an additional amount to help with the increased tax liability. This tax assistance is referred to as "gross-up." The term refers to the fact that the employee is paid a larger gross amount so that the net benefit, after taxes, will approximate the intended amount of the payment.
The gross-up payment itself also is taxable to the employee and subject to withholding and payroll tax. To fully tax protect the employee, the gross-up must itself be "grossed up," and the gross-up of the gross-up must be grossed up, and so on. Also referred to as “tax on tax.”