Supplemental Wages Vs. Regular Wages: The Complete Guide

Cash wages

If you’re a business owner or manager in charge of payroll, you’ve probably heard the words “supplemental wages” spoken in hushed, almost fearful tones. That’s because dealing with supplemental wages in your business may seem difficult at first.

There are many misconceptions about supplemental wages vs. regular wages and the rules regarding timing, calculation, and withholding. But supplemental wages aren’t as undecipherable as you might first suspect. With just a bit of practice, you’ll be calculating supplemental wages like a pro.

In this complete guide, the management experts at Sling discuss everything you need to know about supplemental wages and how to use them in your business.

Supplemental Wages: What They Are

Man holding cash from his supplemental wages

According to the Internal Revenue Service’s Employer’s Tax Guide (Circular E), supplemental wages are exactly what they sound like: supplemental pay or other compensation given to an employee in addition to their regular wages.

This is a fairly broad definition, but for good reason. The IRS considers many types of employee remuneration as supplemental wages, including:

  • Bonuses
  • Awards
  • Back pay
  • Taxable fringe benefits
  • Retroactive wage increases
  • Nonaccountable expense allowances
  • Nondeductible moving expenses
  • Prizes
  • Commissions
  • Severance pay
  • Accumulated sick leave
  • Some overtime

As you can see, supplemental wages aren’t all that uncommon. You might already be using them without even knowing it. But it’s how you pay — and, ultimately, how you withhold taxes for — those supplemental wages when compared to regular wages that makes all the difference.

Supplemental Wages Vs. Regular Wages

Tip jar demonstrating supplemental wages

The main difference between supplemental wages and regular wages is how they’re taxed. And that tax rate comes down to two simple variables:

  • Amount of supplemental wages
  • How you pay the supplemental wages

For example, if you pay an employee more than $1,000,000 in supplemental wages per year, those wages are taxed in a specific way (regardless of how you paid them).

If you pay an employee less than $1,000,000 in supplemental wages per year, those wages are taxed based on how you paid them — either combined with or separate from regular wages.

IRS Rules For Supplemental Wages

More Than $1,000,000

Supplemental wages in excess of $1,000,000 are subject to withholding at 37 percent (or the highest rate of income tax for the year). Here’s an example:

Supplemental Wages = $1,500,000

Tax Rate = 37% (or 0.37 in decimal format)

The equation for figuring out withholding would then look like this:

Withholding = $1,500,000 x 0.37

Withholding = $555,000

In addition, that withholding is done without regard to the employee’s W-4 form.

Combined With Regular Wages

Coins

If you pay supplemental wages with regular wages (i.e., in the same check) but don’t specify the amount of each, you would withhold federal income tax as if the total were a single payment for a regular payroll period.

That means you would determine withholding based on the employee’s W-4 on the IRS tax tables. Here’s an example:

Your single employee indicated 0 withholding allowances on her W-4. She earns $700 per week. One week, you give her a $400 bonus. This bonus is technically supplemental wages, but you lump it together with her regular wages without specifying the dollar value of either (supplemental or regular wages).

After checking the IRS’s Tax And Earned Income Credit Tables for your current year, you find that you have to withhold $111 from the combined regular and supplemental wages.

Separate From Regular Wages

If you pay supplemental wages separately from regular wages, you have two options:

  • In a different check
  • In the same check but specifying the amounts

Here’s how each works out.

In A Different Check

If you pay your employees’ supplemental wages separate from their regular wages (i.e., in different checks), you would withhold 22 percent of those wages for taxes. Here’s an example:

Supplemental Wages = $350

Tax Rate = 22% (or 0.22 in decimal format)

The equation for figuring out withholding would then look like this:

Withholding = $350 x 0.22

Withholding = $77

It’s important to remember that you also have to withhold income tax from their regular wages based on their W-4.

In The Same Check But Specifying The Amounts

Employee counting out her supplemental wages

In this case, you would figure the income tax withholding as if the total of the regular wages and supplemental wages is a single payment.

First, add together the regular and supplemental wages. Then find the tax liability on the combined amount. This is exactly the same as the example given in the Combined With Regular Wages section above:

$700 regular wages + $400 supplemental wages = $1100

Tax withheld = $111

But, in this case, you now have to do a few more calculations.

Next, determine the tax liability for the employee’s regular pay of $700 (i.e., $71). Finally, subtract the tax liability for the employee’s regular pay ($71) from the total tax liability ($111):

$111 total tax liability – $71 regular pay liability = $40

That $40 is the amount you would withhold as a tax on the employee’s supplemental wages.

As you can see, dealing with supplemental wages can be a chore and make payroll difficult. But you can get control with the right tools.

Get Control Of Your Payroll With Sling

Sling app

Calculating supplemental wages vs. regular wages may sound like tedious and confusing work (and it can be if you’re doing it for several employees). But software like Sling can significantly reduce the time it takes to process all the necessary information.

Sling has all the tools you’ll need to deal with all types of payroll, including:

And when you use Sling to get control of the many aspects of your business, it can have a serious impact on your bottom line.

For more free resources to help you manage your business better, organize and schedule your team, and track and calculate labor costs, visit GetSling.com today.

An Important Note

Please note that this is not an exhaustive explanation of how to handle supplemental wages. Some of the information may differ slightly based on your business and where it operates. Be sure to review all federal, state, and local requirements — or consult with a professional — before calculating your own supplemental wages.

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