supplemental wages

What Are Supplemental Wages?

Supplemental wages refer to payments made to employees in addition to their regular wages or salary. These additional payments may include bonuses, commissions, overtime, severance, or accumulated sick leave payouts. Unlike regular wages, paid on a predictable schedule, supplemental wages are typically irregular or one-time payments. One distinguishing feature of supplemental wages is that they are often subject to different tax withholding rules than regular wages. This is because the IRS allows employers to choose between two methods for withholding taxes on supplemental wages: aggregate or flat-rate. Understanding and properly managing supplemental wages is important for both employers and employees to ensure accurate tax reporting and compliance with IRS regulations.

Is Supplemental Pay Taxed Higher?

Supplemental pay, such as bonuses, commissions, and overtime, is often taxed more than regular wages. This is because the IRS allows employers to choose between two methods for withholding taxes on supplemental wages: the aggregate method or the flat-rate method. Under the aggregate method, supplemental wages are added to an employee’s regular wages for the current or previous pay period, and taxes are calculated based on the total amount. This can result in higher tax withholding, especially if the combined income pushes the employee into a higher tax bracket. Alternatively, under the flat-rate method, a flat withholding rate of 22% is applied to supplemental wages up to $1 million for the calendar year, and a higher rate of 37% is applied to amounts exceeding $1 million. However, employees can reclaim overpaid taxes when filing their annual tax return. 

What Is an example of a Supplemental Wage?

Let’s say Sarah works in sales and gets paid a monthly base salary of $2,000. On top of that, she earns a commission of 10% on everything she sells. This commission is a classic example of supplemental wages. It’s an additional payment on top of her guaranteed salary and is directly tied to her performance. If she has a solid sales month and sells $10,000 of products, her commission would be an extra $1,000 (10% * $10,000). This $1,000 would be considered supplemental wages. Other supplemental wages include overtime pay for working extra hours, a performance bonus for exceeding expectations or accumulated sick leave or vacation pay that gets cashed out when leaving a job.

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