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Grossing Up Sales Spiffs

What is best practices around grossing up a sales spiff (e.g. trip to Aruba) as a %?  What happens if you have a sales staff that cross many brackets?

Answers

Topic Expert
Keith Perry
Title: Consulting CFO and Business Operations A..
Company: Growth Accelerator
(Consulting CFO and Business Operations Advisor, Growth Accelerator) |

Are you talking about reporting, forecasting or other? Could you add a little color to the situation?

Anonymous
(EVP- CAO & CFO) |

I am talking about is there a particular percentage one would use across the board for any sales person being awarded a spiff. For example, if XYZ Company awarded 7 trips to Aruba which costs $3,000 to various folks who are in different states, different tax brackets, some already through the FICA threshold; does one just use the SAME gross-up on reporting in payroll to compensate them for the taxable benefit or does one, from a best practice perspective, individualize it? Thank you.

Len Green
Title: Performance Improvement Consultant and E..
Company: Haygarth Consulting LLC
LinkedIn Profile
(Performance Improvement Consultant and ERP Strategist, Haygarth Consulting LLC) |

Because of the potential differences in state income tax rates, I'd individualize the gross up. But I'd also not over worry, because a 1% error is only $30 and that's peanuts compared to the benefit of the spiff IMHO>

Anonymous
(CFO) |

Are you serious, you are really going to tax the sales reps for an Aruba trip for meeting the sales quota? That is what gives us accountants a bad name with the sales people, "accountants with blinders on".

Damon Butler
Title: CFO
Company: The Protective Group, Inc.
(CFO, The Protective Group, Inc.) |

Not quite. He's going to report as taxable income the trip, which it is per the IRS, and then he's going to gross up the amount by an appropriate level to cover the additional tax that is incurred so that there's no net cost to the sales force. You may need to work on your tax compliance knowledge.

Anonymous
(CFO) |

Simply award the sales people a bonus of $3K or whatever the trip is worth via payroll and let them go to Aruba or whereever they want! Trying to gross up the spiff with some arbitrary % is too much brain surgery in my opinion and not worth the time involved vs. any real or perceived value.

Topic Expert
Christine McKay
Title: Controller/Finance
Company:
(Controller/Finance, ) |

First, make sure you have a policy in place for such awards. Salespeople work hard no doubt, however per IRS rules all consideration (income, awards, value of gifts) is taxable. Either gross up their payout and pay cash so they can do what they want with it (Aruba or otherwise), or you would need to report the value of the trip as income and tax would apply. There's no way to beat Uncle Sam.

Topic Expert
Keith Perry
Title: Consulting CFO and Business Operations A..
Company: Growth Accelerator
(Consulting CFO and Business Operations Advisor, Growth Accelerator) |

Anonymous,

Thanks for the clarification:
I see the benefit in the "Trip to Aruba" vs. cash (my sales folks like the cash, but it doesn't have the "GlenGarry GlenRoss" ring to it). Also, it forces them to take a break, which these days is probably a good thing.

Assuming you're using an outside provider (ala paychex) doing this for 7 folks on an individualized basis isn't an extraordinary amount of work at the outset....*but*, you'd also have to take into account FICA through the end of the year. What if this effectively pushed someone over the FICA limit? What if in the end, they'd be over the limit anyhow so the gross-up would be superfluous? What if they've got outside income that affects their bracket....etc and so on. You can't get this right, and the small state variations are relatively irrelevant.

Summarizing the guidance above that aligns with my approach:
-Have a policy, documented, including what gross-up means.
-Have it be flat: if they want to move to Nevada to save on tax...so be it.
-Nancy covers FICA/Medicare above; I would go with a rate of something like 25% (not dissimilar from how options are treated) to capture the likely blended impact of their marginal tax rate, and not worry past that.

Topic Expert
Keith Perry
Title: Consulting CFO and Business Operations A..
Company: Growth Accelerator
(Consulting CFO and Business Operations Advisor, Growth Accelerator) |

Love the slippery slope of gross-ups! Good exercise in sum-limit functions ;-)

Anonymous
(VP -Finance / Controller) |

If you are trying to gross it up for the income tax effect as well (not just SS and Medicare) to keep it neutral to the employee (giving them a net $3,000 benefit for the trip), you need to use the top marginal rate for federal and your state. There is no way to know your employees effective marginal rate. Top rate in 2013 is 39.6%. Your state is going to vary but for example, the formerly Golden State of California's top rate is 13.3%. Your top combined rate would be a whopping 39.6+13.3+6.2 (FICA) = 59.1%. Granted, you need to be making over $450k per year, but that is the rate you would be grossing it up by.

You would process a non-cash bonus to their paychecks for $5,076.00 to net them a $3,000 benefit. An easier way might be to call your payroll company and have them do the calculation based on their withholdings and tax filing status. It will result in a lower amount being recorded (and out of the company's pocket).

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