What Is a Supplemental Bonus and How Is It Taxed?
Understand how supplemental bonuses are taxed and what this means for your take-home pay. Gain clarity on this common form of compensation.
Workplace compensation often includes additional earnings beyond regular paychecks. These payments, which can recognize performance or fulfill specific contractual obligations, are frequently subject to distinct tax rules.
Understanding Supplemental Bonuses
Supplemental wages are payments employees receive separate from their regular salary or hourly wages. These earnings are often irregular or unpredictable, distinguishing them from consistent paychecks. Examples include performance bonuses, year-end recognition, sales commissions, overtime pay, accumulated sick or vacation leave payouts, severance pay, awards, prizes, back pay, and retroactive pay increases. Supplemental wages are treated differently from regular wages for tax withholding purposes.
Federal Income Tax Withholding on Supplemental Wages
The Internal Revenue Service (IRS) provides employers with two main methods for withholding federal income tax on supplemental wages: the percentage method (also known as the flat rate method) and the aggregate method. The method chosen depends on how the supplemental wages are paid and if they are separately identified from regular wages.
The percentage method applies when supplemental wages, such as a bonus, are paid separately from regular wages or are clearly identified on a pay stub. For supplemental wages up to $1 million in a calendar year, employers withhold federal income tax at a flat rate of 22%. Amounts exceeding $1 million from a single employer in a calendar year are subject to a mandatory 37% withholding rate. This rate applies even if an employee claims exemption from federal income tax withholding on their Form W-4.
The aggregate method applies when supplemental wages are paid concurrently with regular wages or are not separately identified. Under this method, the employer combines the supplemental wages with the regular wages from the current or most recent payroll period. Federal income tax withholding is calculated on this combined amount as a single payment, using the employee’s Form W-4 and IRS withholding tables. The amount already withheld from regular wages is then subtracted, and the remaining tax is withheld from the supplemental wages.
Other Tax Liabilities
Beyond federal income tax withholding, supplemental bonuses are subject to other payroll taxes, affecting the overall amount an employee receives. These include FICA taxes, state income taxes, and local income taxes.
Supplemental bonuses are subject to Federal Insurance Contributions Act (FICA) taxes, which fund Social Security and Medicare. For 2025, the Social Security tax rate for employees is 6.2% on wages up to an annual wage base limit of $176,100. The Medicare tax rate is 1.45% on all covered earnings, with no wage base limit. An Additional Medicare Tax of 0.9% applies to wages exceeding $200,000 in a calendar year for employees, without a corresponding employer contribution.
State income tax withholding rules for supplemental wages vary across jurisdictions. Some states may have a flat rate similar to the federal percentage method, while others might require the aggregate method or follow federal guidelines. Local income taxes, imposed by cities or counties, may also apply to supplemental bonuses depending on the employee’s specific location.
Tax withholding is an estimate of an employee’s tax liability. The actual tax owed on supplemental wages, combined with all other income, is determined when an individual files their annual income tax return. If too much tax was withheld, the employee may receive a refund; if too little, they might owe additional tax.