Supplemental wages
Supplemental wages are wage payments to an employee that are not regular wages, such as bonuses, commissions, severance pay and back pay. The IRS has separate federal income tax withholding rules for them, including an optional 22% flat rate under certain conditions. They remain subject to Social Security, Medicare and FUTA taxes.
Quick facts
Figures are as of October 2026.
Item
Rule
Optional flat rate
22%, when its conditions are met
Aggregate method
Withholding figured on supplemental and regular wages combined, minus tax already withheld
Mandatory rate
37% on the part of an employee’s supplemental wages above $1 million in a calendar year
What counts as supplemental wages
The IRS defines supplemental wages in Publication 15. Its list includes bonuses, commissions, overtime pay, accumulated sick leave payments, severance pay, awards, prizes, back pay, reported tips and retroactive pay increases. Employers may instead treat overtime pay and tips as regular wages. Supplemental pay combined with regular wages, without the amounts being specified, is withheld as a single regular payment.
How income tax withholding works
For an employee’s supplemental wages up to $1 million in a calendar year, a supplemental payment made separately from regular wages, or combined with them but with each amount specified, is withheld under one of two methods. If income tax was withheld from the employee’s regular wages in the current or preceding calendar year, the employer may use the flat 22% rate or the aggregate method. If it was not, the aggregate method applies. The regulation on supplemental wage payments sets the conditions for the aggregate and optional flat rate methods.
Under the flat rate method, the employer withholds 22%, and no other percentage is allowed. Form W-4 entries are disregarded other than the exempt claim.
Under the aggregate method, the employer adds the supplemental pay to the regular wages for the same period (or the current or preceding period if none were paid at the same time), figures withholding on the total using the employee’s Form W-4, subtracts the tax already withheld or to be withheld from the regular wages, and withholds the remainder. Publication 15-T provides the income tax withholding tables employers use to figure withholding on regular wages and, in certain situations, on supplemental wages.
When the 37% rate applies
The part of an employee’s supplemental wages above $1 million in a calendar year is withheld at 37%, regardless of Form W-4. The test is cumulative across the calendar year, and businesses under common control are counted together.
Hypothetical example of a bonus paid separately
An employee earns $2,000 a month, is single, and has $65 of income tax withheld from regular pay. The employer pays a $1,000 bonus separately, in a year when income tax was withheld from regular wages.
* Flat rate method. Income tax withheld is 22% x $1,000 = $220.00.
* Aggregate method. Publication 15’s example gives $179 as the withholding on the combined $3,000 ($2,000 + $1,000), so income tax withheld from the bonus is $179 minus $65 = $114.00.
* Employee FICA under either method. Social Security is 6.2% x $1,000 = $62.00 and Medicare is 1.45% x $1,000 = $14.50, for $76.50 in total.
The example assumes wages below the $184,500 Social Security base and ignores state taxes.
Frequently asked questions
Is a bonus taxed at a flat 22%?
The flat 22% rate applies to a bonus for federal income tax withholding only if the employer chooses it and the conditions are met, including income tax having been withheld from regular wages in the current or preceding calendar year. For a separately paid bonus that does not meet them, the aggregate method applies.
Are supplemental wages subject to Social Security and Medicare tax?
Supplemental wages are subject to Social Security and Medicare tax, along with FUTA tax, whichever income tax withholding method the employer uses. Social Security applies up to the 2026 wage base of $184,500, and Medicare has no wage base limit.
Is overtime pay a supplemental wage?
Publication 15 lists overtime pay as a supplemental wage, but employers may treat overtime pay and tips as regular wages for withholding.
Related terms: Form W-4, Form W-2, Overtime pay, FICA, Payroll tax.
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