A second bonus to pay the tax on the first payment is often called a double bonus. Some employers pay not only an amount sufficient to pay premiums but also the tax on the bonus.
To compute the amount that the employer must pay the employee so that he or she will net an amount sufficient to pay both the premium and the tax on it, divide the premium by one minus the employee’s combined income tax bracket. For instance, suppose the covered employee is in a combined federal and state income tax bracket of 30 percent and the premium is $10,000. The employer must bonus out $14,285.71 for the employee to net $10,000 after tax. [$10,000 divided by one minus .30 (.70) equals $14,285.71. Thus, $14,285.71 multiplied by .70 equals $10,000.] This is the nature of a double bonus.
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Reproduced with permission. Copyright The National Underwriter Co. Division of ALM