Taxation of Supplemental Pay

by Gregory Hamel

    Workers occasionally receive compensation in the form of bonuses, commissions or other supplemental pay that is not a part of regular wages. Supplemental wages are subject to income tax, Social Security tax and Medicare tax just like normal wages. Employers that pay supplemental wages are required to withhold a portion of supplemental income to cover the worker's income tax liability.

    Supplemental Wage Basics

    Supplemental wages describe a variety of common payments that workers may receive from employers. Example of supplemental wages include bonuses, awards, prizes, commissions, overtime pay, severance, payment for accumulated sick days, back pay and retroactive pay raises. Taxable fringe benefits, such as the personal use of a company car and meals and lodging that are not provided for an employer's convenience are also subject to the rules that apply to supplemental wages.

    Tax Withholding

    When you receive a paycheck, the amount of money you actually take home is less than the amount you earn because your employer holds back a portion of your income to cover your tax obligations. Supplemental wages are subject to special tax withholding rules. According to the Internal Revenue Service, employers must withhold tax on supplemental wage payments made separately from normal wages at a flat rate of 25 percent or at a rate based on the combined supplemental wages and regular wages from the concurrent pay period.

    High Income Earners

    Employees who receive large bonuses or have high income from other sources of supplemental wages are subject to different tax withholding rules than normal workers. If an employee makes more than $1 million in supplemental wages, the wages that exceed $1 million are subject to an automatic withholding rate of 35 percent. Employers must withhold 35 percent of supplemental wages regardless of the allowances an employee claims on Form W-4 -- the tax form employees use to set up tax withholding.

    Achievement Awards

    While awards and prizes are generally subject to rules that apply supplemental wages, there is an exception for awards related to work achievements. The exception applies to tangible personal property given to an employee as an award for length of service or a safety achievement, up to a maximum value of $1,600. The exception does not apply to awards of cash, cash equivalents, gift certificates or intangible property.

    About the Author

    Gregory Hamel has been a writer since September 2008 and has also authored three novels. He has a Bachelor of Arts in economics from St. Olaf College. Hamel maintains a blog focused on massive open online courses and computer programming.

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