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

HR

Federal Tax Deposit 101: Everything Employers Must Know

Federal Tax Deposit 101: Everything Employers Must Know

What is a Federal Tax Deposit? Most would agree that taxes is not an exciting topic. But a full understanding of the rules around taxes is absolutely essential for employers. It’s a major responsibility to manage employees and follow the requirements of withholding taxes from employee wages.The IRS has specific and strict guidelines around withheld taxes. Any withheld taxes must be deposited to the IRS in the appropriate manner. This process is called the federal tax deposit.In this guide, we’ll outline the important aspects of payroll processing and the federal tax deposit.Before we dig into the federal tax deposit, these are the important areas within employee taxes and payroll. Paycheck calculation and preparation Withholding taxes...

Webinar: How Paycor Can Take Blackbaud's Payroll 7 Clients To The Next Level - 1/16/20 @2pm ET

Webinar: How Paycor Can Take Blackbaud's Payroll 7 Clients To The Next Level - 1/16/20 @2pm ET

Blackbaud’s Payroll clients have been asking for a more robust payroll offering and we’re excited to announce a new partnership between Blackbaud and Paycor.An industry-leading HR and payroll provider with nearly 30 years of experience serving small to medium-sized businesses, Paycor will not only deliver more robust payroll functionality, but also a suite of products and services to help Blackbaud clients better serve their mission.Join us on January 16th as Paycor Senior Vice President, Rick Chouteau, and Blackbaud Partner Development Leader, Craig Suppin, showcase why Paycor can be chosen to replace the Payroll 7 module, helping your organization improve operational efficiencies while reducing risk.In this webinar, we’ll share: • A...

Leap Year Payroll: How to Handle 27 Pay Periods

Leap Year Payroll: How to Handle 27 Pay Periods

If you pay employees bi-weekly, you normally have 26 pay periods a year. But 2020 brings you an extra one—thanks, leap year. True, an extra pay period isn’t exclusive to leap years, sometimes it just depends on which day of the week you pay your employees. But regardless of when it occurs, it can cause headaches for HR and payroll administrators who aren’t prepared.There are a few ways to approach a 27-pay-period year, but the most important thing is to communicate your plan to your workforce. Make sure they understand what to expect so there aren’t any surprises surrounding their paychecks. How to Pay Employees During a Year with 27 Pay Periods Option 1: Everyone gets an extra paycheck. Woo-hoo! The extra paycheck would be for the same...

Case Study: Rochester University

Case Study: Rochester University

Michigan based Rochester University relied on their own payroll processing for nearly 60 years. But when their payroll administrator decided to retire, they turned to Paycor to help them save time and resources. “In the three years we’ve been a Paycor customer, I’ve never had a problem reaching my dedicated support team. If I have an emergency, I know I can trust Paycor.” – Ginny May, Director of HR With Paycor, Rochester University has significantly transformed how they manage HR and process payroll with Paycor Time, Paycor’s Mobile App and ACA filing. By eliminating manual work, their staff has more time to focus on strategic initiatives like finding the right faculty members, motivating employees and creating better experiences for...