Flat Tax Withholding

Flat Tax Withholding is a method of withholding federal income tax at a fixed percentage rate from certain types of income, rather than using the graduated tax brackets applied to wages or salaries. This withholding approach is commonly used for supplemental wages like bonuses, commissions, and severance pay, where a flat rate is applied to simplify tax withholding.

Key Facts

• Common Flat Rate: The IRS currently mandates a flat withholding rate of 22% on most supplemental wages up to $1 million.
• Supplemental Wages Covered: Includes bonuses, commissions, severance pay, awards, and other non-regular wage payments.
• Higher Rate for Large Payments: Supplemental wages over $1 million are subject to a flat withholding rate of 37%.
• Separate from Regular Wage Withholding: Flat tax withholding applies only to supplemental wages, while regular wages are taxed using standard withholding tables based on Form W-4.
• Employer Discretion: Employers may combine supplemental wages with regular wages for withholding purposes or use the flat rate method.
• IRS Guidance: The IRS allows either the aggregate method or the flat rate method for withholding on supplemental wages.

1. What is flat tax withholding?

It’s a fixed percentage tax withholding applied to supplemental wages like bonuses and commissions, rather than graduated rates.

2. What is the current flat withholding rate?

Generally, 22% on supplemental wages up to $1 million.

3. When does the flat rate increase to 37%?

For supplemental wages over $1 million, the withholding rate rises to 37%.

4. Can employers choose not to use flat tax withholding?

Yes, employers can use the aggregate method by combining supplemental and regular wages for withholding.

5. Is flat tax withholding the final tax?

No, it’s a withholding method. The actual tax owed is calculated on your annual tax return.