Supplemental wages are compensation paid in addition to an employee's regular wages. They include, but are not limited to, bonuses, commissions, overtime pay, payments for accumulated sick leave, severance pay, awards, prizes, back pay, retroactive pay increases, and payments for nondeductible moving expenses. Other payments subject to the supplemental wage rules include taxable fringe benefits and expense allowances paid under a nonaccountable plan. How you withhold on supplemental wages depends on whether the supplemental payment is identified as a separate payment from regular wages. See Regulations section 31.3402(g)-1 for additional guidance for wages paid after January 1, 2007. Also see Revenue Ruling 2008-29, 2008-24 I.R.B. 1149, available at www.irs.gov/irb/2008-24_IRB/ar08.html
Special rules apply to the extent that supplemental wages paid to any one employee during the calendar year exceed $1,000,000. If a supplemental wage payment, together with other supplemental wage payments made to the employee during the calendar year, exceeds $1,000,000, the excess is subject to withholding at 35 percent (or the highest rate of income tax for the year). Withhold using the 35% rate without regard to the employee's Form W-4. In determining supplemental wages paid to the employee during the year, include payments from all businesses under common control. For more information, see Treasury Decision 9276, 2006-37 I.R.B. 423, available at www.irs.gov/irb/2006-37_IRB/ar09.html
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 income tax to be withheld.taxmap/pubs/p15-009.htm#en_us_publink100011652
If you pay supplemental wages with regular wages but do not specify the amount of each, withhold federal income tax as if the total were a single payment for a regular payroll period.taxmap/pubs/p15-009.htm#en_us_publink100011653
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 withheld income tax from an employee's regular wages in the current or immediately preceding calendar year, you can use one of the following methods for the supplemental wages.
- Withhold a flat 25% (no other percentage allowed).
- Add the supplemental wages to the concurrently paid regular wages, or, if there are no concurrently paid regular wages, to the most recent payment of regular wages this year. Then figure the income tax withholding as if the total was a single payment. Subtract the tax already withheld from the regular wages. Withhold the remaining tax from the supplemental wages. If there are no concurrently paid regular wages but 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 did not withhold income tax from the employee's regular wages in the current or immediately preceding calendar year, use method 1-b above. This would occur, for example, when the value of the employee's withholding allowances claimed on Form W-4 is more than the wages.
Regardless of the method that you use to withhold income tax on supplemental wages, they are subject to social security, Medicare, and FUTA taxes.taxmap/pubs/p15-009.htm#en_us_publink100011654
You pay John Peters a base salary on the 1st of each month. He is single and claims one withholding allowance. In January of 2009, he is paid $1,000. Using the wage bracket tables, you withhold $50 from this amount. In February 2009, he receives salary of $1,000 plus a commission of $2,000, which you include with regular wages. You figure the withholding based on the total of $3,000. The correct withholding from the tables is $342.
The new wage withholding tables found in Publication 15-T were used to calculate the withholding amounts for the next three examples.
You pay Sharon Warren a base salary on the 1st of each month. She is single and claims one allowance. Her May 1, 2009, pay is $2,000. Using the wage bracket tables, you withhold $154. On May 14, 2009, she receives a bonus of $2,000. Electing to use supplemental payment method 1-b, you:
- Add the bonus amount to the amount of wages from the most recent pay date ($2,000 + $2,000 = $4,000).
- Determine the amount of withholding on the combined $4,000 amount to be $524 using the wage bracket tables.
- Subtract the amount withheld from wages on the most recent pay date from the combined withholding amount ($524 – $154 = $370).
- Withhold $370 from the bonus payment.
The facts are the same as in Example 2, except that you elect to use the flat rate method of withholding on the bonus. You withhold 25% of $2,000, or $500, from Sharon's bonus payment.taxmap/pubs/p15-009.htm#en_us_publink100011657
The facts are the same as in Example 2, except that you elect to pay Sharon a second bonus of $1,000 on May 28. Using supplemental payment method 1-b, you:
- Add the bonus amount to the amount of wages from the most recent pay date ($2,000 + $2,000 + $1,000 = $5,000).
- Determine the amount of withholding on the combined $5,000 amount to be $774 using the wage bracket tables.
- Subtract the amount withheld from wages on the most recent pay date and from the first bonus payment from the combined withholding amount ($774 – $524 = $250).
- Withhold $250 from the second bonus payment.
Withhold income tax on tips from wages or from other funds that the employee makes available. If an employee receives regular wages and reports tips, figure income tax withholding as if the tips were supplemental wages. If you have not withheld income tax from the regular wages, add the tips to the regular wages. Then withhold income tax on the total. If you withheld income tax from the regular wages, you can withhold on the tips by method 1-a or 1-b earlier.taxmap/pubs/p15-009.htm#en_us_publink100011659
Vacation pay is subject to withholding as if it were a regular wage payment. When vacation pay is in addition to regular wages for the vacation period, treat it as a supplemental wage payment. If the vacation pay is for a time longer than your usual payroll period, spread it over the pay periods for which you pay it.