Supplemental wages
Supplemental wages are wage payments to an employee that are not regular wages, such as bonuses, commissions, severance pay, and back pay.
- LAW
- 26 CFR §31.3402(g)-1
- RATE
- 22% optional flat rate for federal withholding
- CAP
- 37% mandatory above $1 million a year
- WATCH FOR
- Withholding 22% after supplemental pay passes $1 million
Regular wages are paid at a regular periodic rate, not an overtime rate, or a predetermined fixed amount per payroll period. Everything else is supplemental. How you withhold federal income tax on it depends on whether you pay it separately from regular wages. Once supplemental wages from you and businesses under common control pass $1 million in a year, withhold 37% on the excess. Social Security, Medicare, and FUTAFUTA. FUTA is the federal unemployment tax you pay on the first $7,000 of each employee’s wages a year, with nothing withheld from pay.Click to open the term apply as on regular pay. Many states set their own supplemental rate or method.
Which withholding method applies?
Pay supplemental wages together with regular wages without specifying each amount, and you withhold on the total as one regular payment. Identify them separately and you can choose a flat 22% or the aggregate method. That choice needs income tax withheld from the employee’s regular wages this year or last. The flat rate follows the income tax rate schedule set by law, so confirm the current rate each year.
| SITUATION | FEDERAL INCOME TAX WITHHOLDING |
|---|---|
| Paid with regular wages, amounts not specified | Withhold on the total as one regular payment |
| Paid separately or amounts specified, regular wages had income tax withheld this year or last | A flat 22%, or the aggregate method |
| Paid separately or amounts specified, no income tax withheld from regular wages | The aggregate method |
| Supplemental wages over $1 million in the calendar year, counting businesses under common control | 37% on the excess, without regard to Form W-4 |
How does the aggregate method work?
The aggregate method treats the supplemental payment as part of one regular paycheck. It uses the employee’s regular withholding information. If you made other supplemental payments earlier in the same payroll period, add them to the total too.
- 01
Add the supplemental payment to the regular wages paid with it, or to the current or preceding period’s regular wages.
- 02
Figure the withholding on the combined amount as if it were a single regular payment.
- 03
Subtract the tax already withheld, or to be withheld, from the regular wages and any earlier supplemental payments.
- 04
Withhold the remainder from the supplemental payment.
What counts as supplemental wages?
Common examples include bonuses, commissions, overtime payOvertime pay. Overtime pay is 1.5 times the regular rate, owed under the FLSA for each hour a non-exempt employee works over 40 in a workweek.Click to open the term, severance paySeverance pay. Severance pay is a payment made to an employee at the end of employment, separate from any final wages owed for hours already worked.Click to open the term, back pay, retroactive payRetroactive pay. Retroactive pay, or retro pay, is the difference you owe an employee for past work when a rate change should have applied earlier.Click to open the term increases, awards, and prizes. Taxable fringe benefitsTaxable fringe benefits. Taxable fringe benefits are noncash or employer-provided items that count as wages and must be added to taxable compensation for one or more wage bases.Click to open the term and expense allowances paid under a nonaccountable plan follow the supplemental rules too. A payment supplemental for withholding can still count in other calculations, such as the regular rate for overtime. You can run a supplemental payment off-cycle or inside a regular payroll run.
Frequently asked
- Publication 15 (2026), (Circular E), Employer’s Tax Guide
- 26 CFR § 31.3402(g)-1 - Supplemental wage payments
- 26 U.S. Code § 3402 - Income tax collected at source
General information, not legal or tax advice. Apply current federal and state rules with qualified guidance.