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Supplemental Wages

Supplemental wages are any additional payment the employee receives on top of their salary. Supplemental wages are subject to tax-withholding by the employer, even if the employee submits a Form W-4. The withholdings and tax rates on supplemental wages depend on the state and local laws, as well as the current federal tax laws.

The Difference between Supplemental and Regular Wages

Regular wages are two types: a fixed salary an employee receives or a regular hourly wage in return for their work. They are paid at regular intervals - once a month, every two weeks, or every week. The amount withheld from regular wages depends on the tax table for the pay period. 

Supplemental wages vary from pay period to pay period. Their amount doesn’t depend on the hours worked but on other criteria. Because of this, they are subject to different taxation rules. For example, the employer may withhold different percentages of an employee’s supplementary wages every pay period. Some forms of supplemental wages are even subject to different tax rules altogether. Examples include the exercise of nonstatutory stock options and imputed income for health coverage of non-dependent people.

What Payments Qualify as Supplemental Wages

According to the Internal Revenue Service (IRS), many forms of additional cash payment qualify as supplemental wages. The most common supplemental wages employers offer their employees include:

  • Tips
  • Commissions on sales
  • Overtime
  • Bonuses for good performance
  • Accumulated sick leave
  • Expense allowances and travel reimbursement
  • Severance pay
  • Non-deductible moving expenses
  • Back pay of unreceived wages
  • Retroactive pay increases
  • Awards and prizes

The type of supplemental wages employees receive depend on the company they work for at the moment. The industry and current trends may also affect the types of supplemental wages workers may expect to receive for their labor.

What Does Not Qualify as Supplemental Wages

There are a few forms of additional payments that the IRS doesn’t consider supplemental wages. These include:

  • Stipends for further education paid by the employer to the employee
  • Paid time off (PTO) when used according to the state, local, and current federal legislation
  • Vacation pay when used according to the current state, local, and federal legislation

There are cases when the Paid Time Off and vacation pay may become supplemental wages. That happens when the employee receives them on top of regular wages. That is possible, for instance, when the unused PTO and vacation pay are paid out at the end of the year as supplemental wages. In instances when an employee uses their vacation or personal time off, they receive these wages in place of their regular wage. In such cases, there aren’t supplemental wages.

Who Reports Supplemental Wages?

It is the responsibility of the employer to report supplemental wages to the IRS. Supplemental wages are subject to different withholding rules than regular ones. The amount of supplemental wages the employer pays to the employee within the fiscal year determines the withholdings. Another factor is whether the supplemental wages are combined with the regular ones or considered a separate affair.

In the same vein, the amount of tax due depends on how much the employee earns overall. Their full taxable income (regular + supplemental wages) determines the tax bracket they are in.

Supplemental Wages of Less than $1 Million A Year

If the employee receives their supplemental pay combined with their regular wages, the employer withholds the normal amount of federal income tax. The amount is specified in the Form W-4 the employee fills out.

There are two specific scenarios when the supplemental wages are separate from the regular ones. The employer could:

  • Withhold a flat 22% if they have already withheld income tax from the employee’s regular wages the previous year
  • Use the employee’s Form W-4 to withhold federal income tax after combining the supplemental and regular wages. To do that, the employer must pay the supplemental wages to the employee at the same time as their regular wages.

Supplemental Wages of Over $1 Million A Year

All supplemental wages of over one million dollars are subject to a flat tax rate of $37 percent. The withholding is mandatory, even if the employee has filed a Form W-4 claiming federal tax exemption.