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Supplementary wages

What are supplemental wages?

Supplemental wages are payments paid to employees in addition to their normal pay. Overtime, bonuses, commissions, and other benefits are among them. An employer may be compelled to withhold taxes from supplemental wages if they are provided.  

Employees who earn supplemental pay receive money in addition to their normal pay.

What are examples of supplemental income?

An employee, for example, earns $1,150,000 in additional compensation. You must apply the special 37 percent tax rate since $150,000 of their supplemental wages exceeds $1 million. For federal income tax purposes, you would deduct $55,500 from the employee's $150,000 surplus ($150,000 X 0.37 = $55,500).

  • Supplemental income examples are given as below:
  • Bonuses
  • Commission pay
  • Overtime pay
  • Payments for accumulated sick leave
  • Severance pay
  • Awards
  • Prizes
  • Back pay
  • Retro pay increases
  • Payments for non-deductible moving expenses

How do supplemental wages differ from regular wages?

Wages paid by an employer at a regular hourly rate or in a predetermined fixed amount for a payroll period are referred to as regular wages. In the case of regular earnings, the amount to be withheld is determined by the tax table for the pay period (e.g., bi-weekly) and the number of exemptions claimed on the employee's IRS Form W-4.  

Supplementary wages, to put it another way, are pay that varies from pay period to pay period based on criteria other than the amount of time spent.

Overtime pay, bonuses, back pay, commissions, wages paid under reimbursement or other expense allowance arrangements, nonqualified deferred compensation, noncash fringe benefits, sick pay paid by a third party acting on behalf of the employer, amounts includible in gross income under IRC section 409A, income recognised on the exercise of a non-statutory stock option, and imputed income for health coverage for a nondependent are all examples of supplemental wages.

What is a supplemental pay check?

Vacation pay, bonuses, commissions, and dismissal pay are all included in a supplemental check. These payments are not made at the same time as the usual pay check. You can choose whether to pay the supplemental wage as a separate check or as part of your regular salary.

How are supplemental wages taxed?

Employers can withhold taxes on supplemental earnings by adding all of the employee's wages (supplemental and regular) and withholding taxes on the total amount.  

Separate supplemental wages from regular pay and withhold a flat tax rate of 25%. Any other rate is prohibited by the IRS.  

Alternatively, do a complex calculation to determine the tax withholding on supplemental and regular pay separately.  

Employers can choose to aggregate and tax all extra pay or utilise the flat 25% rate if the supplemental wages do not exceed one million dollars. However, if the supplemental wages exceed one million dollars, the employer is required to withhold a 37 percent tax on the amount over one million dollars.

Percentage method

The method based on percentages. If, like me, you receive your bonus money in a check separate from your pay check, this is the approach your employer will use. To keep things simple on their end, your company simply withholds tax at a flat rate of 22 percent (if over $1 million, the highest rate of income tax for the year is applied, which is presently 37 percent). This strategy also applies to other sorts of extra income, such as severance compensation, commissions, over time, and so on.

Aggregate method

The method of accumulation. If your bonus is added to a normal pay check, your employer will use this technique. Your company will deduct tax from your bonus and regular wages based on the information you provided on your W-4. Your employer will withhold more money than usual because you are receiving more money than usual.

Why are supplemental wages taxed differently?

Taxes may be withheld differently from the rest of your paycheck depending on how your employer distributes the funds.  

Payment in one lump sum. If the supplemental income is coupled with your regular salary in a single payment, your employer may withhold federal income tax in the same way as regular pay, taking into account your current tax allowances.  

Separate payment is required. If you get supplemental income as a separate payment, IRS guidelines allow employers to withhold income tax at a flat rate of 22% on the payment, regardless of your typical tax withholding rate.

This may mean that a larger portion of your supplemental income payment is deducted than is deducted from your regular pay in some situations.  

$1 million and above. If you receive more than $1 million in supplemental pay, any sum over that is taxed at a higher rate, which in 2020 is 37 percent.