Key points about the supplemental wage tax rate:
- Supplemental wages are wages that you pay an employee in addition to their regular compensation.
- Different Federal and state requirements dictate how to tax supplemental pay.
- You can use the chart below to quickly find your state’s supplemental wage tax rate.
Many businesses offer bonuses, commissions, and other forms of compensation to their employees. These payments are typically known as supplemental wages, and they can add an extra layer of complexity to income tax withholding. If you give your employees supplemental wages, you need to know how this additional pay impacts Federal income taxes in order to stay compliant.
What are supplemental wages?
Supplemental wages are wages that you give an employee in addition to their regular wages. Supplemental wages may include:
- Overtime pay
- Severance pay
- Vacation pay
- And more
You may give supplemental wages to your employees in separate payments or lumped in with their regular wages. Keep in mind that the method you choose may determine how you tax supplemental pay.
How do you tax supplemental wages?
If you provide supplemental wages, your Federal income tax withholding may become slightly more complicated. How you tax these wages, and which rate you use, depends on the amount of supplemental wages your employee receives. Below are a few examples to help you tax supplemental wages correctly.
If your employee receives more than $1 million in supplemental wages for the year:
Withhold tax on the amount over $1 million at the highest Federal income tax rate. This rate is currently 37%.
For example, you may have an employee who earned $1,350,000 in supplemental wages during the calendar year. They earned $350,000 over $1 million, so you would need to withhold 37% (or the current highest Federal income tax rate) from that $350,000 excess. In the end, you would withhold $129,500.
$350,000 × 0.37 = $129,500
If your employee receives less than or equal to $1 million in supplemental wages for the year:
You have a few options for Federal income withholding. You can:
1. Combine the employee’s regular wages and supplemental wages paid.
In this case, you would add the employee’s supplemental wages to their regular wages and withhold Federal income tax as usual on the total amount. Treat the total combined amount as if it were a single payment for a regular payroll period and determine how much to withhold using the appropriate tax bracket for the employee. If you use this method, you will not need to use the supplemental wage tax rate.
For example, you have an employee who makes $1,500 biweekly and receives a bonus of $500. On their Form W-4, they marked that they are Single or Married filing separately. If you combine their supplemental wages ($500) with their regular wages ($1,500), the total amount is $2,000. Using the current tax bracket tables, you see that the amount to withhold for wages of $2,000 is $176 (page 12). As a result, you withhold $176 in Federal income tax for this pay period.
2. Identify the employee’s supplemental wages separately from their regular wages.
In this case, you may identify the employee’s supplemental wages separately from their regular wages but pay them at the same time. Or, you may pay the employee’s supplemental wages at a different time than you pay their regular wages. If you identify the amount of each type of payment the employee receives (supplemental vs. regular wages), you have some additional options:
Option 1: Withhold a flat Federal supplemental tax rate
If you withheld income tax from the employee’s regular wages in the current or prior calendar year, you can withhold a flat percentage from the employee’s supplemental wages. The flat Federal supplemental tax rate is currently 22% (no other percentage is allowed). Withhold Federal income tax on the employee’s regular wages as normal.
For example, you have an employee who earns a bonus of $500. Using this method, you would withhold $110 from the bonus ($500 × 0.22 = $110).
Option 2: Withhold based on a calculation
If you have not withheld income tax from the employee’s regular wages in the current or prior calendar year, you need to perform a more complex calculation:
- Add together the employee’s regular wages and supplemental wages.
- Determine the income tax withholding for this total using the appropriate income tax withholding bracket.
- Determine the income tax withholding for just the employee’s regular wages using the appropriate income tax withholding bracket.
- Subtract the income tax withholding amount for the employee’s regular wages (the result from step 3) from the income tax withholding amount for the employee’s total wages (the result from step 2).
- Withhold the resulting amount from the employee’s supplemental wages.
For example, let’s say an employee makes $1,500 biweekly and receives a bonus of $500. On their Form W-4, they marked that they are Single or Married filing separately.
- Start by adding their regular wages to their supplemental wages. You get $2,000 ($1,500 + $500 = $2,000).
- Determine the income tax withholding for their combined wages of $2,000 using the current wage bracket tables. You see that the amount to withhold is $176 (page 12).
- Determine the income tax withholding for their regular wages of $1,500 using the wage bracket tables. You see that the amount to withhold is $116 (page 12).
- Subtract the income tax withholding amount for the employee’s regular wages ($116) from the income tax withholding amount for the employee’s total wages ($176). You get $60 ($176 – $116 = $60).
- Withhold $60 from the employee’s bonus of $500.
What is the supplemental pay tax rate in each state?
As noted above, the Federal supplemental tax rate is 37% for supplemental wages greater than $1 million, and 22% for supplemental wages less than $1 million (if you identify an employee’s supplemental wages separately from their regular wages).
Some states also have their own tax rates for supplemental wages as taxable income. In these states, this is an additional amount that you must withhold from an employee’s supplemental wages on top of any Federal requirements.
In many states where there is no specific supplemental wage withholding rate, you need to follow the state’s rules for income tax withholding as it applies to supplemental wages. Always check your state and local government websites for the most up-to-date information.
Check out the chart below for supplemental tax rates by state:
Simplify supplemental wage withholding
If you’re looking for more handy information about all things payroll, check out our Guide for Payroll Professionals: What You Need to Know About Payroll, Taxes, & Compliance. This guide gives you a comprehensive look at payroll and tax legislation, wage rates, deductions, contribution limits, tax forms, and more so you can stay compliant and manage payroll easily!
If you want to make payroll even easier, consider leveraging a full-service payroll and tax provider like Sentric. Our experts will calculate and deposit your taxes, file your forms, print and distribute your employees’ paychecks, and more. To learn more, speak with one of our product experts today!
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