Supplemental wages: are payments to employees beyond their regular wages, such as bonuses, commissions, severance, back pay, and some overtime. The IRS allows employers to withhold federal income tax on them at a flat 22%, or 37% on supplemental wages above $1 million in a calendar year.
Key takeaways
- Bonuses, commissions, severance, back pay, and awards are the most common supplemental wages.
- The 22% flat rate is optional for most supplemental payments up to $1 million.
- Above $1 million in a year, 37% withholding is mandatory on the excess.
- FICA and state taxes still apply; many states set their own supplemental rate.
How supplemental wages works
The IRS gives two ways to withhold on supplemental wages (IRS Publication 15 (Circular E), Employer's Tax Guide). With the percentage method, if the payment is separately identified and you withheld income tax from the employee's regular wages this year or last, you can withhold a flat 22%. With the aggregate method, you add the supplemental payment to regular wages for the period, calculate withholding on the total as if it were one paycheck, and subtract what was already withheld from the regular wages.
Once an employee's supplemental wages pass $1 million in a calendar year, you must withhold 37% on the amount over $1 million, regardless of the W-4. Social Security and Medicare apply to supplemental wages at normal rates, and the Social Security wage base cap still applies.
States vary. California, for example, uses 10.23% for bonuses and stock options and 6.6% for other supplemental wages.
Supplemental wages example
A product manager earning $140,000 receives a $15,000 annual bonus in a separate payment.
| Federal income tax at 22% | $3,300.00 |
|---|---|
| Social Security at 6.2% | $930.00 |
| Medicare at 1.45% | $217.50 |
| California supplemental at 10.23% | $1,534.50 |
| Net bonus | $9,018.00 |
The employee may feel over-taxed, but withholding isn't the final tax. If the employee's actual marginal rate is lower than 22%, they'll get some of it back at filing.
Why supplemental wages matters for employers
Bonus season creates more payroll questions than almost any other event, and most of them are about withholding. A short note explaining the flat rate, and that it's a prepayment rather than the final tax, saves hours of follow-up.
Supplemental wages also matter for budgets. Variable pay is growing as employers hold base increases down: WorldatWork's survey of 4,250 total rewards and HR leaders found US salary increase budgets averaged 3.7% in 2025 and were projected at 3.6% for 2026 (WorldatWork 2025-2026 Salary Budget Survey). More of total pay is coming through bonuses and incentives, all of which run through supplemental wage rules.
Common supplemental wages mistakes to avoid
Using 22% after $1 million
Withholding at 37% on the excess is mandatory, not optional.
Skipping FICA on bonuses
Supplemental wages are subject to Social Security and Medicare like any other wages.
Forgetting the employee's 401(k) election
If the plan includes bonuses in compensation, deferrals apply to the bonus check.
Combining with regular pay without the aggregate method
If you combine the payments, you must use the aggregate method for withholding.
Supplemental wages: questions people also ask
What is the federal tax rate on bonuses?
Is overtime considered supplemental wages?
Is severance pay supplemental wages?
Why was my bonus taxed so much?
Do all states have a supplemental tax rate?
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HRTally glossary entries are written by people who have run US payroll, benefits, and HR operations, then checked line by line against primary sources such as the IRS, Department of Labor, EEOC, and Bureau of Labor Statistics. Dollar limits and rates are for 2026 unless stated. We review every entry at least twice a year and whenever a rule changes. This page explains general rules and isn't legal or tax advice; state law can differ. Read our editorial standards.
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<blockquote>Supplemental wages are payments to employees beyond their regular wages, such as bonuses, commissions, severance, back pay, and some overtime. The IRS allows employers to withhold federal income tax on them at a flat 22%, or 37% on supplemental wages above $1 million in a calendar year.</blockquote><p>Source: <a href="https://www.hrtally.com/hr-glossary/supplemental-wages/">HRTally HR Glossary, Supplemental wages</a></p>
Written by the HRTally Research Team
Our guides are written and reviewed by people with hands-on US HR, payroll, and HR technology experience. Legal and tax facts are checked against primary sources, such as the Department of Labor, IRS, EEOC, and USCIS, and linked at the end of each guide. Vendors never review or pay for our editorial content.