Supplemental Wages are types of employee compensation that are paid in addition to regular wages. These include bonuses, commissions, overtime, severance pay, accumulated sick leave, awards, prizes, back pay, and payments for nondeductible moving expenses. They are taxed differently from regular wages and often subject to a flat federal withholding rate depending on how they’re paid. Employers must follow specific IRS guidelines to determine the correct withholding method.
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Key Facts
- Additional Earnings: These are not part of the employee's base pay and usually represent irregular or one-time payments.
- Flat Withholding Rate: The IRS allows a flat federal withholding rate (currently 22%) if supplemental wages are paid separately from regular wages.
- Aggregate Method Option: If supplemental wages are combined with regular wages in a single payment, they must be taxed as a whole using standard withholding tables.
- FICA Tax Applies: Like regular wages, supplemental wages are subject to Social Security and Medicare (FICA) taxes.
- Examples Include: Bonuses, commissions, severance pay, retroactive pay increases, and taxable fringe benefits.
1. How are supplemental wages taxed differently from regular wages?
If paid separately, they're typically subject to a flat 22% federal withholding rate; otherwise, they’re taxed using the employee’s regular withholding rate.
2. Are supplemental wages subject to Social Security and Medicare taxes?
Yes, regardless of how they’re paid, they are still subject to FICA taxes.
3. Can an employee choose how supplemental wages are taxed?
No, the employer determines the taxation method based on how the payment is issued and IRS guidelines.
4. What’s the difference between supplemental wages and regular wages?
Regular wages are predictable and recurring (hourly/salary), while supplemental wages are additional, often variable, and not tied to routine pay cycles.
5. Why is it important to classify supplemental wages correctly?
Proper classification ensures compliance with tax laws and accurate payroll reporting for both the employer and the employee.
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