Supplemental Wages

Supplemental wages are payments to an employee beyond regular wages, such as bonuses, commissions, and severance. The IRS sets special withholding methods for them, which is where the federal bonus tax rate comes from.

A common mistake is treating the bonus rate as a separate tax. It is only an income tax withholding method, and the employee still owes Social Security and Medicare tax on the same payment.

What Counts as Supplemental Wages?

Publication 15 lists bonuses, commissions, overtime pay, severance pay, awards, prizes, back pay, retroactive pay increases, and payments for nondeductible moving expenses. The list is not exhaustive, and taxable fringe benefits also count.

Employers may treat overtime pay and tips as regular wages instead. Regular wages follow the base steps in our federal income tax withholding guide, which this page does not repeat.

How Are Bonuses Taxed: Percentage or Aggregate Method?

Employers withhold federal income tax on a bonus using one of two methods. The percentage method takes a flat 22%, and no other percentage is allowed. The aggregate method adds the bonus to regular wages and withholds on the total.

For 2026, the IRS says the 22% rate remains in place. Confirm the figure for your pay year in the "What's New" section of Publication 15.

When Can You Use the Flat Rate Method?

Two conditions apply under Publication 15. You must show the bonus separately from regular wages, and you must have withheld income tax from regular wages in the current or preceding calendar year. Without both, use the aggregate method.

The flat rate also stops at $1 million. Once one employee's supplemental wages exceed $1 million in a calendar year, the excess is withheld at 37% regardless of Form W-4, counting payments from all businesses under common control.

Do Payroll Taxes and State Rules Also Apply?

Yes. For 2026, IRS Topic 751 sets Social Security at 6.2% up to a $184,500 wage base and Medicare at 1.45% for employees, matched by the employer.

States set their own supplemental rules. California's EDD 2026 employer guide lists 10.23% for bonuses, while Maine allows a flat 5% on separate payments. Check your state's current figures.

What Are Common Supplemental Wage Mistakes?

Most errors come from picking a method without checking its conditions. Watch for these three.

• Applying 22% when no income tax was withheld on regular wages this year or last.
• Folding a bonus into a regular check without stating its amount, which forces the aggregate method.
• Ignoring related businesses when tracking the $1 million threshold.

A bonus line shows gross pay, and the net amount depends on the method used, so explain it up front. Our gross vs net payroll guide shows how deductions flow.

How Does HR Cloud Help With Supplemental Pay Data?

HR Cloud does not set withholding rates; your payroll system applies them. HR Cloud offers two-way payroll integrations that send employee time to payroll and import employee data from payroll.

Its People HRIS keeps one record per employee for job, pay, and performance data. To see it in action, request a demo.

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Frequently Asked Questions

Q: Is vacation pay a supplemental wage?

A: Not when it replaces regular pay for time off, which is withheld like regular wages. An extra lump sum paid on top of regular wages is supplemental, per Publication 15.

Q: Does the Additional Medicare Tax apply to bonuses?

A: Yes, once wages pass $200,000 in a calendar year. Employers withhold an extra 0.9% with no employer match, according to IRS Topic 751.

Q: Does Form W-4 change bonus withholding?

A: Not under the flat method, which is a fixed 22%. The aggregate method uses the withholding tables, which rely on the employee's W-4 information.

Q: What if an employer pays two bonuses in one pay period?

A: Under the aggregate method, add all supplemental payments in that payroll period to regular wages, figure tax on the total, and subtract what was already withheld, per Publication 15.

Q: What if the employer promises a net bonus amount?

A: That is a gross-up. The employer raises the gross payment so the employee nets the promised amount, and the added money is itself wages subject to withholding.

Q: Where do the official rules live?

A: Section 7 of Publication 15 covers supplemental wages, and Publication 15-T holds the withholding tables used for the aggregate method.