Supplemental Wages

What Are Supplemental Wages?

Supplemental wages are additional payments made to an employee outside of their regular wages. They include overtime, bonuses, commission, and more. 

If an employer provides supplemental wages, they may be required to withhold taxes from these payments. And even if an employee fills out a Form W-4, they still may be subject to different withholding/tax rates for supplemental wages. 

What Qualifies and Does Not Qualify as a Supplemental Wage? 

Per the IRS, the following qualify as supplemental wages: 

• Bonuses

• Commission

• Tips 

• Overtime pay

• Accumulated sick leave

• Severance pay 

• Awards 

• Prizes

• Payments for non-deductible moving expenses

• Back pay

• Retroactive pay increases

Please note, employers do have the option to treat overtime pay and tips as regular wages instead of supplemental wages. 

The following generally do not qualify as supplemental wages:

• Stipends

• Paid time off (PTO)

• Vacation pay 

PTO and vacation pay are only considered to be supplemental wages if they are paid in addition to regular wages (for example, when unused PTO/vacation hours are paid out in a form of a lump sum). Otherwise, PTO and vacations aren’t supplemental; they replace the regular wages as if the employee were still working like usual. 

Who Is Responsible for Reporting Supplemental Wages?

Employers are responsible for tracking and reporting supplemental wages. There are unique withholding rules employers must keep in mind. These rules depend on:

• The amount of supplemental wages an employee receives within the tax year 

• Whether an employee’s supplemental wages are combined with regular wages or identified separately from their regular wages

How Are Supplemental Wages Taxed?

How supplemental wages are taxed depends on how much your employee earns. 

Supplemental Wages of More Than $1 Million

If your employee makes over $1 million in supplemental wages during the tax year, the money that exceeds the $1 million mark is subject to a 37 percent tax rate in 2020, or the highest income tax rate for that year. 

This 37 percent is mandatory, even if your employee submitted a Form W-4 claiming exemption from federal income tax withholding. 

Supplemental Wages of $1 Million or Less

If your employee does not make over $1 million in supplemental wages during the tax year, there are two circumstances you need to look at to make the right tax calculations: 

• If the employee’s supplemental wages are combined with their regular wages and the amount of each type of payment (supplemental vs. regular) is not specified, then you should withhold federal income tax as you normally would. In other words, you would refer to the employee’s Form W-4 to make the federal tax withholding. 

• If you identify your employee’s supplemental wages separately from regular wages, you must do one of two things:

1. Withhold a flat 22 percent tax fee (this is only if you’ve withheld income tax from an employee’s regular wages in the current or the prior tax year), or whatever the proper rate is for the current year.

2. Combine their supplemental wages with their regular wages and withhold federal income tax from this total, using the employee’s Form W-4. Please note, this is only if you pay your employee’s supplemental wages simultaneously with regular wages. 

For more information on exceptions and calculations refer to IRS Publication 15, pages 19-21. 

What Is the Supplemental Wage Tax Rate? 

As noted above, the federal supplemental wage tax rate in 2020 is 37 percent for those with supplemental wages over $1 million and 22 percent for everyone else.  

There are state supplemental wage tax rates that vary. Employers can refer to Ernst & Young’s latest state income tax chart on supplemental rates. Keep in mind, some states follow a tax range based on the supplemental wage amount, so be sure to look into your own state’s rules and regulations.