What are Supplemental Wages?

Supplemental wages refer to extra payments made to employees outside their regular salary or wage. Such payments include overtime, bonuses, and commission, among others. Employers are required to withhold taxes from supplemental wages and to follow unique withholding rules.

Which Payments and Arrangements Classify as Supplemental Wages?

The following payments and arrangements classify as supplemental wages according to the Internal Revenue Service (IRS):

  • Overtime pay
  • Bonuses and commission
  • Payment for unused sick leave or vacation leave in cases where it is included as a lump sum
  • Awards for meeting performance objectives
  • Back pay resulting from a pay increase
  • Payments for no more than ten days of service
  • Golden parachute payments for a top executive ousted after a merger or acquisition

Employers have the option of treating overtime pay and tips as regular wages rather than supplemental. On the other hand, payments for sick leave, vacation pay, and any other form of time off are only supplemental if disbursed in addition to regular wages.

What are some employer responsibilities?

Employers bear the responsibility of tracking, reporting, and withholding taxes from supplemental wages. Withholding rates depend on an employee’s total compensation, filing status, and tax bracket. In the case of supplemental wage payments exceeding $1 million, the excess amount is subject to a mandatory 37% tax in 2020, independent of any claim for federal income tax exemption on Form W-4. Where the supplemental amount is less than $1 million, there are specific tax rules to follow to determine the amount to withhold. State income tax rates on supplemental wages vary, with some following a range based on the supplementary wage amount.