What Is Additional Pay and How Does It Affect Your Earnings?

Additional pay refers to compensation an employee receives beyond their regular salary or hourly wages. These payments supplement an individual’s standard income. Understanding these forms of compensation and their financial implications is important for managing personal finances.

Various Forms of Additional Pay

Overtime pay is a common form of additional compensation for hours worked exceeding a standard 40-hour workweek. Federal law mandates overtime at a rate of at least one and a half times an employee’s regular rate of pay for non-exempt workers. This higher rate applies to hours beyond the standard weekly threshold.

Bonuses represent a category of additional pay, often awarded based on various criteria. These can include performance bonuses for achieving specific goals, sign-on bonuses to attract new talent, or retention bonuses designed to keep valuable employees. Discretionary bonuses are awarded at an employer’s sole discretion, without prior commitment.

Commissions are a type of additional pay directly tied to an individual’s sales performance or generated revenue. This compensation is usually calculated as a percentage of the sales amount or profit achieved. Commissions often form a substantial part of the earnings for sales professionals.

Holiday pay involves compensation for working on a recognized holiday or paid time off. Employers may offer a premium rate for hours worked on holidays, such as double pay. Other arrangements include providing regular pay for a holiday even if the employee does not work.

Shift differentials offer extra pay for working less desirable hours, such as night or weekend shifts. This compensation incentivizes employees to work during inconvenient times. The extra amount can be a flat rate per hour or a percentage of the regular hourly wage.

Tips are direct payments from customers for services rendered. Employees receive tips directly or as part of a tip pool. Federal regulations outline rules for tip credits and tip pooling.

Severance pay is compensation provided to an employee upon termination of employment, often in cases of layoffs or company restructuring. It can be a lump sum or paid out over a period. Severance agreements typically include terms regarding the payout amount and any conditions for receiving it.

Expense reimbursements cover legitimate business expenses incurred by an employee, such as for travel, meals, or supplies. These reimbursements are generally not considered taxable income if they are part of an “accountable plan” that requires substantiation of expenses and return of excess advances.

How Additional Pay Affects Your Earnings

Most forms of additional pay are considered taxable income and are subject to various deductions. While these payments increase gross earnings, the net take-home amount will be less due to withholdings. Understanding these deductions is important for financial planning.

Additional pay is subject to federal income tax withholding. The IRS classifies these payments as “supplemental wages.” Employers may withhold federal income tax from supplemental wages using a flat rate, often 22%, or by combining them with regular wages.

Additional pay is also subject to Social Security and Medicare taxes, known as FICA taxes. The Social Security tax rate is 6.2% on earnings up to an annual wage base limit, which is $176,100 for 2025. The Medicare tax rate is 1.45% on all earnings, with no wage base limit. High-income earners may face an additional 0.9% Medicare tax on wages exceeding certain thresholds.

State and local income taxes may also apply, varying by jurisdiction. Employers withhold these taxes in addition to federal and FICA taxes.

Other deductions may apply, including contributions to retirement plans like a 401(k), health insurance premiums, and other voluntary deductions. Legal requirements, such as wage garnishments, can also reduce the net amount received.