Supplemental pay

Supplemental pay refers to additional income received by employees in addition to their regular wages or salary. It is also known as supplemental income.

Supplemental wages encompass various forms of compensation, as outlined in IRS Publication 15 (Circular E). These include:

• Bonuses

• Overtime pay

• Awards

• Commissions

• Accumulated and unused sick leave

• Severance pay

• Vacation pay

• Tips

• Back pay

• Taxable fringe benefits

• Retroactive pay increases

This list is not exhaustive, and employers may include additional types of supplemental pay as part of their compensation packages.

Supplemental wages differ from regular wages in several ways, including payment timing, tax rates, and tax reporting requirements.

1. Payment Schedule: Regular wages are typically paid on a scheduled basis (e.g., monthly), whereas supplemental wages may be paid at irregular intervals, such as quarterly or as lump-sum payments for bonuses or relocation expenses.

2. Mandatory vs. Non-Mandatory: Regular wages are mandatory payments for work performed, whereas supplemental wages are discretionary and depend on the employer's policies.

3. Taxation: The IRS applies different tax rules to supplemental wages:

3.1. For supplemental wages exceeding $1 million in a calendar year, the tax rate is 37%. 3.2. For supplemental wages up to $1 million, employers can use either the percentage method or the aggregate method to calculate federal income tax withholding. 3.3. If supplemental wages are paid separately from regular wages, different withholding methods apply depending on how they are paid and reported.

States may have their own tax rates and rules for supplemental wages. For example, California applies a 6.60% tax rate on most types of supplemental pay, but it varies for stock options and bonuses.

Correctly withholding taxes on supplemental pay is crucial for compliance. Employers must ensure they withhold federal income tax, Social Security, Medicare taxes, and FUTA taxes as applicable. Using automated payroll solutions can help manage these obligations efficiently.

This overview is not a substitute for professional tax advice. Employers should consult official IRS publications and seek guidance from tax professionals to ensure compliance with all tax regulations.