Example 4-11

GROSSING-UP. Cotter Company wants to award a $4,000 bonus to Donna D'Amico. In addition, it wants the net bonus payment to equal $4,000. Assuming D'Amico is still under the OASDI/FICA limit, the calculation would be:

A.	$4,000
	1 0.22 (supplemental W/H rate) 0.062 (OASDI) 0.0145 (HI)

B.	$4,000	= $5,685.86 grossed-up bonus
	0.7035

C.	Gross bonus amount	$5,685.85*
	Federal Income Tax withheld	1,250.89
	OASDI tax withheld	352.52
	HI tax withheld	82.44
	Take-home bonus check	$4,000.00

If state or local taxes apply, they must also be included in the formula.

*Need to subtract $0.01 from $5,685.86 in order to arrive at $4,000.00 (due to rounding).

Mattola Company is giving each of its employees a holiday bonus of $275 on December 13, 20-- (a nonpayday). The company wants each employee's check to be $275. The supplemental tax percent is used.

Nobody has capped for OASDI prior to the bonus check.

As we go to press, the federal income tax rates for 2021 are being determined by budget talks in Washington and not available for publication. For this edition, the 2020 federal income tax tables for Manual Systems with Forms W-4 from 2020 or later with Standard Withholding and 2020 FICA rates have been used.

a. What will be the gross amount of each bonus if each employee pays a state income tax of 2.8% (besides the other payroll taxes)? You may need to add one penny to the gross so that net bonus exactly equals $275. Round your calculations and final answers to the nearest cent. $

b. What would the net amount of each bonus check be if the company did not gross-up the bonus? Round your intermediary calculations to the nearest cent.