This blog post is written for American businesses. Click here for How the Bonus Tax Method Works in Canada.
Supplemental wages are the wage payments you pay an employee outside of their regular wages. If you give your employee a bonus, it is considered a supplemental wage.
Supplemental wages, like bonuses, have additional tax requirements that you need to be aware of as an employer.
For instance, if you offer a retirement plan such as a 401(k) plan, you should refer to the Summary Plan Document (SPD) to determine whether the 401(k) amount should be deducted from an employee’s bonus compensation.
In this post, we will discuss the two methods of how supplemental wages can be treated from a tax standpoint as an employer.
If the supplemental wages paid to the employee during the calendar year are less than or equal to $1,000,000, the following rules apply in determining the amount of federal income tax to be withheld.
1. Supplemental Wages Combined With Regular Wages
If you pay supplemental wages with regular wages and do not specify or separate the amounts for each, you would need to withhold federal income tax as if the total were a single payment for a regular payroll period.
To illustrate the method above, imagine an employee — John Smith, who is paid a base salary on the 1st of each month. He is single and claims one withholding allowance.
In January, he is paid $1,000. Using the wage bracket table for income tax withholding, you would withhold $50 from this amount. In February, he receives a salary of $1,000, plus a bonus of $2,000, which you combine with regular wages and do not identify separately.
Using this bonus tax calculation method, you determine the withholding based on the total of $3,000, which would amount to $336 in withholdings based on the wage bracket tables.
2. Supplemental Wages Identified Separately From Regular Wages
If you pay supplemental wages separately (or combine them in a single payment and specify the amount of each), the federal income tax withholding method depends partly on whether you withhold income tax from your employee’s regular wages.
- If you withhold income tax from an employee’s regular wages, you can use one of the following methods for the supplemental wages:
- Withhold a flat 25% (no other percentage allowed).
- Add up the supplemental and regular wages for the most recent payroll period this year and calculate the income tax withholding as if the total amount was a single payment. Then, you need to subtract the tax already withheld from the regular wages and withhold the remaining tax from the supplemental wages. If there were other payments of supplemental wages (after the last payment of regular wages, but before the current payment of supplemental wages), aggregate all the payments, calculate the tax on the total, subtract the tax already withheld from the regular wages and the previous supplemental wages, and withhold the remaining tax.
- If you do not withhold income tax from the employee’s regular wages, use the method outlined above in A-2.
This would occur, for example, when the value of the employee’s withholding allowances claimed on Form W-4 is more than the wages.
For instance, if you pay Jane Jones a base salary on the 1st of each month. She is single and claims one allowance.
Her May 1 pay is $2,000 and using the wage bracket tables, you withhold $186. On May 14, she receives a bonus of $1,000. Electing to use supplemental wage withholding method a-2, you:
- Add the bonus amount to the amount of wages from the most recent base salary pay date (May 1) i.e. ($2,000 + $1,000 = $3,000).
- Determine the amount of withholding on the combined $3,000 amount to be $336 using the wage bracket tables.
- Subtract the amount withheld from wages on the most recent base salary pay date (May 1) from the combined withholding amount ($336 – $186 = $150).
- Withhold $150 from the bonus payment.
Regardless of the method that you use to withhold income tax on supplemental wages, they are subject to social security, Medicare, and FUTA taxes.
In addition to the federal tax withholding, you will also need to withhold state-level taxes on the supplemental wages. Please refer to our state-by-state interactive tax map for the appropriate state-level bonus tax rates.
Keep in mind, if you accumulate a federal tax liability of $100,000 or more on any day during a deposit period, you must deposit the tax by close of the next business day, whether you are a monthly or semiweekly schedule depositor.
While either treatment of supplemental wages is acceptable from an employer standpoint, there are some obvious benefits to separating the bonus check from regular wages:
- Issuing a bonus check separately from a payroll check makes it easier for your accountant/bookkeeper to track payroll transactions.
- It is easier for your financially-savvy employees to track their tax liabilities by separating the bonus payment from their regular wages.
- Lastly, separating the two amounts also makes it easier for your payroll department to track payments to employees in the event you need to reconcile bonus payments.
Disclaimer: The advice we share on our blog is intended to be informational. It does not replace the expertise of accredited business professionals.
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