Avoid Costly Mistakes: Understand Supplemental Wages
supplemental income tax rate

Avoid Costly Mistakes: Understand Supplemental Wages

Supplemental wages, or payments made in addition to an employee’s ordinary wages, are in a league of their own when it comes to taxes and government regulations. They are subject to Social Security and Medicare taxes, separate state-specific withholding practices and state labor department requirements, increasing the complexity of compliance.

Due to increased Department of Labor crackdowns on wage and hour violations under the Fair Labor Standards Act, there has never been a more urgent time to understand supplemental wages. With audits and investigations becoming more and more common thanks to increased IRS funding, the consequences for mishandling supplemental wages are more serious than ever.

Quick facts about supplemental wages

Supplemental wages include, but are not limited to:

* Bonuses
* Commissions
* Tips
* Severance pay
* Overtime pay
* Taxable fringe benefits such as unused vacation or sick days
* Awards
* Back pay
* Retroactive pay

It is important to understand the difference between supplemental and regular wages because the two types are subject to different federal wage laws and different withholding practices. For example, whereas regular wages must be paid within seven days of the end of the determined pay period, supplemental wages do not, and therefore the two can be paid at different times.

As far as withholding procedures for supplemental wages, there are a few different ways to handle them. Regular wages are usually withheld based on marital status and numbers of withholding allowances, but supplemental wages are not.

To withhold taxes on supplemental wages, an employer can add together the entirety of the employee’s wages (supplemental and regular) and withhold taxes on the entire amount. Or, employers can tax supplemental wages at a flat rate of 25%. The IRS does not allow any other rate. Finally, the employer can perform a complicated calculation to figure the tax withholding on the supplemental wages and regular wages separately.

And there is more: if the supplemental wages do not exceed one million dollars, employers can choose to combine and tax all the wages or they can use the flat 25% rate. But if the supplemental wages do exceed one million dollars, the employer must withhold a 35% tax on the excess amount after one million dollars.

Further, there are exceptions on how to treat vacation and tips. Vacation pay is treated as a supplemental wage if the pay is more than the regular wages that would be paid during that time. Tips are treated as supplemental wages if the employee receives wages and tips. If the employer does not withhold tax from the regular wages, tips are added to the regular wages and the entire amount is taxed. However, if the regular wages are taxed, tips are withheld at 25%.

Between the federal regulations described here and the taxation rules in each U.S. state, supplemental wages can make your head spin. Now more than ever, wage and hour missteps are not ones you can afford to make. It’s a smart choice to partner with an expert to protect your business from costly penalties: find out how Paycor’s intuitive HR and payroll solutions can help you stay compliant with supplemental wage regulations.

Source: U.S. Department of Labor


Subscribe to Our Resource Center Digest

Enter your email below to receive a weekly recap of the latest articles from Paycor's Resource Center.

Check your inbox for an email confirming your subscription. Enjoy!

More to Discover

Payroll Errors: 12 Common Mistakes You Might Be Making

Payroll Errors: 12 Common Mistakes You Might Be Making

Payroll Matters The payroll process is a necessary component of any business and The Department of Labor (DOL) keeps a close eye on businesses to help ensure they pay their employees correctly, and the Internal Revenue Service (IRS) and state taxing authorities are always going to make sure they receive the appropriate tax payments. 12 Common Errors to Avoid Everyone makes mistakes, and we’re hopeful they’re caught before anything bad happens. But it’s imperative to make sure that you’re not making any of these relatively common payroll mistakes if you manually calculate payroll in-house. Misclassifying employees and contractors In the gig economy, temps, freelancers, consultants and other independent contractors are commonly found in...

Dayrise Residential Outgrows Their PEO

Dayrise Residential Outgrows Their PEO

Dayrise Residential had a great problem. Founded in 2011, this multifamily housing and operations company now manages nearly 80 properties in eight states and employs, at any given time, close to 500 people. As the Dayrise business grew, they found that their HR and Payroll needs were outgrowing their PEO. Dayrise needed to streamline their recruiting process to keep pace with the demands of filling new positions. And once the recruiting problem was solved, they needed help onboarding and training employees. They also needed access to their data and analytics—and their rigid PEO partner just couldn’t make it happen. So Dayrise met with Paycor. What impressed them right away was that Paycor is not in the business of flashy demos and “...

HR

Lunch Break Laws By State

Lunch Break Laws By State

Lunch Breaks Aren’t a Requirement for Employers Most employers provide their employees with a paid or unpaid lunch break and some provide additional rest break periods. But did you know that breaks aren’t required by law? Federal law, anyway. The Fair Labor Standards Act (FLSA), the law that governs wages and hours, does not mandate that employers provide meal or rest breaks to employees. Like many other federal laws in the human resources space, some states have stepped in to bridge the gap. Here's What You Need to Know The federal law dictates that if an employee gets meal or rest breaks, the company does not have to pay them for that time unless: State law requires paid breaks The employee works through a break time (e.g., if they eat...

HR

Age Discrimination in the Workplace

Age Discrimination in the Workplace

Take a Quick Scan of Your Job Descriptions Do they ask for “a recent graduate,” a person “with 1-3 years of experience,” a “digital native” or worst of all, someone who would be a great fit for your “young and cool” team? Do you have an age requirement for certain jobs (excluding businesses that sell alcohol and require the person to be at least 21 years old, of course)? If so, your company could be headed to the courtroom to defend itself against an age discrimination lawsuit. Workers Ages 40+ Aren’t the Only Protected Class In 1967, President Lyndon Johnson passed the Age Discrimination in Employment Act (ADEA), which is designed to protect job candidates and employees 40 and up from age discrimination in the workplace. While it doesn’...