Grossing Up Awards: Why and Why Not

Over the years, the practice of grossing up cash awards has become a source of confusion and controversy for managers and personnelists. To bring our readers up to date, this article provides some background and current observations on grossing up awards.

Grossing Up

Grossing up is a term used to describe raising the total amount of funds to be authorized as a cash award so that the net amount after required tax withholding will be an exact amount—usually an even dollar amount— that the employee is intended to receive.

The original reason grossing up was allowed was for administrative convenience. When small awards were provided in currency out of an imprest fund (e.g., a $25 on-the-spot award), it was easier to give the employee the full amount of $25. The alternative was to give the smaller, odd-change amount left after the required tax withholding was subtracted. Grossing up was never meant to be an option when granting a cash award over a nominal amount that would not be given to the employee as actual currency.

The original "no loose change for administrative convenience" rationale is largely being overtaken by events. First, agencies' use of imprest funds in general—and to pay awards in the form of currency in particular—has decreased substantially in recent years. Second, agencies likely will be required to pay all awards by electronic fund transfer (EFT). Grossing up under these conditions no longer offers an administrative convenience.

Disadvantages of grossing up award amounts

Our experiences observing how awards programs operate in the agencies and answering questions about grossing up have surfaced several problems and dilemmas:

• Grossing Up Increases Costs. Adding the funds to cover tax withholding raises costs considerably. Consider an example where taxes are withheld at the following rates:

  Federal income tax 28.00%
  Medicare tax 1.45%
  Social Security tax 6.20%
  State income tax 6.00%

  Under a grossing up policy, a $1,000 net cash award would actually cost the agency $1,713.80. Such increased costs can quickly deplete an agency's awards budget.

• True Value and Costs Become Hidden. When agencies gross up cash awards, they often have the extra calculations performed by the payroll office after the award has been proposed and approved. For the nominating and approving officials, the focus remains on the net amount and not on the true value of the award. That true value—or actual total cost—is the awards spending that must be monitored and managed.

• Spending is Reported Inaccurately. The awards spending reported to the Central Personnel Data File (CPDF) may be seriously understated when the payroll office calculates the grossed up awards amounts. According to OPM's Guide to Processing Personnel Actions, an agency must report the gross amount of a cash award to the CPDF. The gross amount is the actual cost of the award to the agency, not the net amount received by the employee. Some agencies have not been reporting their actual award costs to the CPDF accurately because the grossed up amount calculated by the payroll office has not been fed back as input to the CPDF.