0.11.5: Grossing Up

An employee may be issued stock at bargain prices (or for free), plus a cash bonus in an amount sufficient to allow the employee to pay tax on the bargain purchase element. This is a relatively simple transaction called "grossing up." The result is that the employee gets the stock, after all taxes are paid, at the bargain price he agreed to pay and the employer, since it is paying the employee in cash, has a pot from which to withhold and, accordingly, take the deduction. The problem is that "grossing up" costs the company money at a time when cash may be scarce and it debits earnings when every drop of reported income may be precious in valuing the company's stock.