What is Supplemental Pay?

Supplemental pay is additional payment an employer made to an employee in addition to the regular base pay.

Author: Douglas Wade, Attorney

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Supplemental pay is additional income an employer pays an employee on top of the employee’s regular monthly wages or salary. For example, an employee earns a bonus one month in the amount of $500, that bonus exists in addition to their normal take-home pay and it categorized as supplemental pay. Another example would be an employer paying an employee an extra commission on a sale that they made.

This article will discuss the different types of supplemental pay and tax liabilities as follows:

1. What is included in supplemental pay?

2. How do I report supplemental wages?

3. How Are Supplemental Wages Taxed?

Supplemental pay includes bonuses, commissions, overtime, time and a half pay, and more. Included in supplemental pay are:

commissions
bonuses
severance payments upon termination of your employment
taxable prizes
awards
retroactive pay increases
reimbursements of nondeductible moving expenses
taxable fringe benefits

Supplemental wages may occur outside of one’s paycheck, but they are within the range of the Internal Revenue Service and the taxes the entity levies on all US employers.

As a result, when companies provide workers with supplementary pay, the business sometimes must withhold taxes on the wages. Additionally, workers must exercise compliance by filling out a W4 and abiding by the IRS’s tax rates for supplementary pay.

The employer is responsible for reporting supplemental pay.

How Are Supplemental Wages Taxed?

If the supplemental wages paid to the employee during the calendar year are less than or equal to $1 million:

If the employer pays supplemental wages with regular wages but don’t specify the amount of each, withhold federal income tax as if the total were a single payment for a regular payroll period.
If the employer withheld income tax from an employee’s regular wages, withholding for the supplemental pay is a flat 22%.

For example, if a worker earns over $1 million in supplemental pay, the IRS taxes anything over that $1 million at a 37% rate. So even if the worker filled out a W-4 and requested an exemption, the tax rate on the earnings still stands.

For supplemental earnings under $1 million, workers can withhold at a 22% rate. Plus, if the employer did not label the wages as supplemental, the worker may be able to add the supplemental pay to their regular pay and then use ordinary rates.

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