Federal Supplemental Withholding Formula

Supplemental Wages and Payroll Supplemental wages are compensation paid to an employee in addition to regular wages and include, but are not limited to, bonuses, commissions, overtime pay, accumulated sick leave, severance pay, awards and prizes, back pay, retroactive wage increases, and payments for non-deductible moving expenses.

Supplemental wages paid at the same time as regular wages If you pay supplemental wages concurrently with wages for a payroll period and you do not specify the amount of each, you must combine the supplemental wages with the wages paid for the payroll period and withhold as if the total were a single wage payment.

If you specifically indicate the amount of each payment, you may withhold at a flat 25% on the portion of the payment representing supplemental wages. For 2018, once annual compensation reaches $1,000,000, supplemental payments must be taxed at the highest bracket rate, 37%.

Supplemental wages paid separately from regular wages If federal income tax has not been withheld from regular wages, the supplemental wage payment must be added to the regular wages for the previous payroll period (in the same calendar year) or to the wages to be paid for the current payroll period. Then you should figure the tax as if the total amount were a single wage payment for the payroll period.

If federal income tax has been withheld from the employee’s regular wages you may either combine the supplemental payment with the regular wages and withhold as if they were a single wage payment after subtracting the amount already withheld from the regular wage payment or withhold a flat 25% of the supplemental wages.

Supplemental wages paid with no connection to regular wages If a supplemental wage payment is made without any possibility of tying it to a regular payroll period in a calendar year, you must treat the payment as a regular wage payment and withhold accordingly.