Yes, some supplemental wages can be tax exempt — but most are not. Under Section 7 of IRS Publication 15, employers must withhold federal income tax on supplemental wages at a flat 22% rate or a mandatory 37% rate on amounts that exceed $1 million in a single calendar year. P.L. 119-21 — known as the One Big Beautiful Bill Act — permanently locked in these withholding rates, which means they are not set to expire.
Narrow exceptions exist. De minimis fringe benefits under IRC §132(e), accountable plan reimbursements, and qualified moving expense reimbursements for active-duty military members allow certain payments to bypass federal income tax withholding entirely. The 2026 social security wage base sits at $184,500, meaning large supplemental wage payments can push employees past this limit and create unexpected tax consequences for both sides of the payroll.
What you’ll learn in this article:
- 💰 Which types of supplemental wages can and cannot qualify for a tax exemption under federal law
- 📋 How the IRS 22% flat rate and 37% mandatory rate work — and what triggers each one
- ⚖️ The specific IRS exceptions that allow certain supplemental payments to avoid withholding
- 🏠 How nine no-income-tax states change the supplemental wage picture for employers and employees
- 🚫 The most expensive mistakes employers make with supplemental wage withholding — and how to dodge IRS penalties
What the IRS Really Means by “Supplemental Wages”
Supplemental wages are all wages that are not regular wages. The IRS defines them as payments that vary from payroll period to payroll period based on factors other than how many hours an employee worked. The IRS guidance on supplemental wages lists bonuses, overtime, back pay, commissions, severance pay, reported tips, taxable fringe benefits, and nonqualified deferred compensation as common examples.
Regular wages follow a predictable pattern — an employee earns the same base amount each pay period, and the employer uses the employee’s Form W-4 to calculate withholding. Supplemental wages break that pattern. The federal government — not the employee’s W-4 — dictates how employers must handle income tax withholding on supplemental wages.
This distinction matters because the withholding method directly affects how much money an employee takes home. An employer who treats a $10,000 bonus the same as regular wages may withhold too much or too little. The IRS draws a hard line between the two categories, and getting it wrong triggers penalties and correction filings.
The Full List of Supplemental Wage Types That Get Taxed
The IRS casts a wide net when classifying supplemental wages. Each type carries its own withholding rules, and employers must track them separately from regular pay.
Bonuses and Commissions
Bonuses reward employees for hitting targets or sticking around through a specific period. Commissions tie pay directly to sales performance. Both fall squarely into the supplemental wages category and are subject to either the 22% flat rate or the aggregate withholding method. Employers often pay these in a lump sum, which can create a noticeable tax bite on the employee’s check.
Overtime Pay
When a non-exempt employee works more than 40 hours in a week, the extra hours generate overtime pay — typically at 1.5 times the regular hourly rate. The IRS treats this extra pay as supplemental wages because it varies from paycheck to paycheck. Employers who combine overtime into the same check as regular wages can use the aggregate method for withholding.
Severance and Back Pay
Severance pay goes to employees who lose their jobs through layoffs or downsizing. Back pay covers money an employer already owed for work an employee already performed. Both are supplemental wages under IRS Publication 15-A, and employers must withhold federal income tax on these payments. Severance packages can be large enough to push an employee past the $1 million supplemental wage threshold in a single year.
Reported Tips
Tips that employees report to their employer count as supplemental wages. The IRS requires employers to withhold income tax and FICA taxes on reported tips just like any other form of supplemental income.
Taxable Fringe Benefits and Expense Reimbursements
When an employer provides a benefit that has personal value to the employee — like personal use of a company car — the IRS treats the fair market value as a taxable fringe benefit. Expense reimbursements paid outside of an accountable plan are also supplemental wages. Gift cards, no matter how small the amount, are always taxable.
Nonqualified Deferred Compensation
Amounts that become includible in an employee’s gross income under IRC §409A count as supplemental wages. This category covers deferred pay arrangements that do not meet the strict IRS qualification rules for tax-advantaged retirement plans.
Accumulated PTO Payouts
If an employer pays out unused vacation or paid time off, that payout is a supplemental wage. The IRS treats PTO cash-outs as supplemental income because the amount varies based on how much leave the employee banked.
| Supplemental Wage Type | Why It’s Taxable |
|---|---|
| Bonuses and commissions | Varies by performance, not hours worked |
| Overtime pay | Exceeds regular hourly wage schedule |
| Severance pay | One-time payment tied to termination |
| Back pay | Retroactive obligation, not regular payroll |
| Reported tips | Income reported outside base salary |
| Taxable fringe benefits | Personal value beyond job duties |
| PTO payouts | Variable amount based on accrued leave |
| Nonqualified deferred compensation | Income recognized under IRC §409A |
Why the IRS Withholds 22% (and When It Jumps to 37%)
The federal government sets two flat withholding rates for supplemental wages. The 22% rate applies to supplemental wages up to and including $1 million in a calendar year. The 37% mandatory rate kicks in on every dollar of supplemental wages that exceeds $1 million.
P.L. 119-21 made these rates permanent by extending the individual tax brackets that the Tax Cuts and Jobs Act (P.L. 115-97) originally created with a sunset date. The 2026 IRS Publication 15 confirms that employers will continue to use these same rates going forward. This means the 22% and 37% rates are no longer temporary — they are the law of the land.
The 37% rate is mandatory. An employer cannot choose a different method when an employee crosses the $1 million threshold. Even if the employee filed a Form W-4 claiming exemption from federal income tax, the 37% withholding still applies to the excess over $1 million. The IRS gives employers zero flexibility on this point.
| Supplemental Wage Amount | Federal Withholding Rate |
|---|---|
| $1 million or less (calendar year) | 22% flat rate (optional) or aggregate method |
| Over $1 million (calendar year) | 37% mandatory flat rate on the excess |
Aggregate Method vs. Flat Rate: Two Paths, Different Results
The IRS offers employers two approved methods for withholding federal income tax on supplemental wages below $1 million: the aggregate method and the flat rate method. Each method produces a different withholding amount, and the choice depends on how the employer structures the payment.
How the Flat Rate Method Works
The flat rate method is straightforward. The employer withholds a flat 22% from the supplemental wage payment. This method works when the employer pays supplemental wages separately from regular wages or tracks each type of payment distinctly.
A quick example: Maria earns a $5,000 year-end bonus paid on a separate check from her regular salary. Her employer uses the flat rate method and withholds $1,100 ($5,000 × 0.22 = $1,100). Maria receives $3,900 before any other deductions.
How the Aggregate Method Works
The aggregate method combines the supplemental wages with the employee’s regular wages for the pay period and treats the total as one payment. The employer then calculates withholding using the employee’s Form W-4 information — the same way they would for a regular paycheck.
There is one critical exception. If an employee has no federal income tax withheld from regular wages (because of their W-4 elections), the employer must use the aggregate method — not the flat rate. The IRS requires employers to combine the supplemental payment with the most recent regular payroll and calculate withholding on the combined total.
Which Method Produces Better Results?
The flat rate method is simpler but can result in over-withholding for lower-income employees and under-withholding for higher-income employees. The aggregate method is more precise because it accounts for the employee’s actual tax bracket. Employers with automated payroll systems tend to use the aggregate method, while those with manual processes lean toward the flat rate.
| Factor | Flat Rate Method |
|---|---|
| Withholding rate | Fixed 22% on supplemental wages |
| Best for | Separately paid bonuses and commissions |
| Factor | Aggregate Method |
|---|---|
| Withholding rate | Based on employee’s W-4 and combined wages |
| Best for | Supplemental wages combined with regular pay |
The Narrow Windows Where Supplemental Wages Escape Taxation
Most supplemental wages are fully taxable. The IRS provides only a few specific exceptions where certain payments that look like supplemental wages can be excluded from an employee’s gross income — and therefore escape federal income tax withholding.
These exceptions are not loopholes. They are written into the Internal Revenue Code and come with strict rules. An employer who claims an exclusion without meeting every requirement faces back taxes, penalties, and interest. The three primary exceptions are de minimis fringe benefits, accountable plan reimbursements, and qualified moving expense reimbursements for certain military and intelligence community members.
Each exception has a different legal basis. De minimis benefits fall under IRC §132(e). Accountable plans operate under IRS Publication 15-B and IRC §62(c). Military moving expense reimbursements now exist under a narrow carve-out that P.L. 119-21 preserved when it permanently eliminated the general moving expense exclusion for all other employees.
De Minimis Fringe Benefits: Small Perks the IRS Ignores
A de minimis fringe benefit is a perk so small and infrequent that tracking it for tax purposes would be unreasonable. The IRS excludes these benefits from an employee’s taxable income entirely — no withholding, no W-2 reporting.
Examples of qualifying de minimis benefits include occasional snacks in the break room, company T-shirts or hats, flowers for a sick employee, holiday turkeys, and personal use of a company copier. The key word is occasional. A benefit provided on a regular or routine basis loses its de minimis status, even if each individual payment is small.
Cash and cash equivalents are never de minimis. This is one of the most misunderstood rules in employment tax law. A $25 gift card, a $10 Starbucks card, or any payment that can be converted to cash is always taxable supplemental income — regardless of the amount. The IRS draws an absolute line here. Meal money and local transportation fare can qualify, but only when provided on an occasional basis because of overtime work.
| De Minimis (Tax-Free) | Not De Minimis (Taxable) |
|---|---|
| Occasional office snacks | Weekly catered lunches |
| Holiday turkey or ham | Gift cards of any amount |
| Company-branded T-shirt | Cash bonuses of any size |
| Personal use of copier | Regular use of company car |
| Flowers for illness | Gym membership |
Accountable Plans: The Legal Way to Reimburse Tax-Free
An accountable plan is the IRS-approved method for employers to reimburse employees for business expenses without creating taxable supplemental wages. Under an accountable plan, reimbursements are excluded from the employee’s gross income and are not subject to federal income tax, Social Security, or Medicare withholding.
The IRS requires three conditions for an accountable plan to qualify under IRC §62(c):
- The expense must have a business connection — it must be incurred while performing services as an employee.
- The employee must adequately account for the expense to the employer within a reasonable time (typically 60 days).
- The employee must return any excess reimbursement within a reasonable time (typically 120 days).
If any one of these three conditions fails, the entire reimbursement becomes taxable supplemental wages. The IRS does not allow partial compliance. An employer who hands an employee a $500 monthly “expense allowance” without requiring receipts or documentation is running a nonaccountable plan — and every dollar is subject to supplemental wage withholding.
Example: Jake works as a sales rep and drives 1,200 miles in January visiting clients. His employer reimburses him $0.70 per mile ($840 total) under a written accountable plan. Jake submits his mileage log within 30 days. The $840 is completely tax-free — no income tax, no FICA, no reporting on Jake’s W-2.
Counter-example: Jake’s employer gives him a flat $1,000 monthly “car allowance” with no mileage tracking or receipt requirement. The full $1,000 is taxable supplemental wages every single month. His employer must withhold 22% (or use the aggregate method) on every payment.
Military Moving Expenses: The Last Standing Exemption
Before P.L. 119-21, all employees could exclude qualified moving expense reimbursements from their gross income when relocating for a new job that met certain distance and time requirements. That general exclusion is now permanently gone for civilian workers.
The 2026 Publication 15-A confirms that only two groups still qualify for tax-free moving expense reimbursements:
- Active-duty members of the U.S. Armed Forces who move because of a permanent change of station due to a military order.
- Employees or new appointees of the intelligence community (as defined in the National Security Act of 1947) who move because of a change in assignment requiring relocation.
For everyone else, employer-paid moving costs are taxable supplemental wages. An employer who pays $15,000 to relocate a new hire from Chicago to New York must include that $15,000 in the employee’s wages and withhold federal income tax. This catches many employers off guard, especially those who still have outdated relocation policies on the books.
What Happens When Supplemental Wages Cross $1 Million
The $1 million threshold is a calendar-year cumulative total — not a per-payment limit. An employer must track all supplemental wages paid to each employee throughout the entire year. The moment total supplemental wages exceed $1 million, every additional dollar triggers the mandatory 37% withholding rate.
This rule applies regardless of the employee’s W-4 elections. An employee who claims “Exempt” on their W-4 still faces 37% withholding on supplemental wages above $1 million. The IRS gives employers no discretion here.
Example: Rachel is a senior executive who earns a $400,000 base salary (regular wages). She also receives the following supplemental wages throughout 2026:
- Q1 bonus: $300,000
- Q2 commission: $350,000
- Q3 bonus: $250,000
- Q4 bonus: $400,000
Her total supplemental wages are $1,300,000. The first $1 million can be withheld at 22% (flat rate) or via the aggregate method. The remaining $300,000 must be withheld at the mandatory 37% rate — no exceptions.
| Rachel’s Supplemental Wages | Withholding Treatment |
|---|---|
| First $1,000,000 | 22% flat rate ($220,000) or aggregate method |
| Remaining $300,000 | 37% mandatory rate ($111,000) |
| Total supplemental wage tax withheld | $331,000 (using flat rate on first $1M) |
How Supplemental Wages Show Up on Forms W-2 and 941
Employers report supplemental wages on several IRS forms, and each form captures different pieces of the puzzle. Getting the reporting wrong can trigger audits and penalty notices.
Form W-2 (Wage and Tax Statement)
Supplemental wages are combined with regular wages in Box 1 (Wages, tips, other compensation) on the employee’s Form W-2. The IRS does not require a separate line item for supplemental wages. Federal income tax withheld from both regular and supplemental wages appears in Box 2. Social Security wages appear in Box 3 (up to the $184,500 wage base for 2026), and Medicare wages appear in Box 5 with no wage base limit.
Employers who provide taxable fringe benefits may optionally report details in Box 14 (Other). This box is informational — it does not change the employee’s tax liability but can help employees understand the breakdown of their total compensation.
Form 941 (Quarterly Federal Tax Return)
Employers report total wages — including all supplemental wages — on Line 2 of Form 941 each quarter. Federal income tax withheld appears on Line 3. Social Security and Medicare taxes appear on Lines 5a through 5d. Employers must reconcile their quarterly 941 filings with the annual W-2 totals.
Form 941-X (Correcting Errors)
When an employer discovers a withholding mistake — over-withholding or under-withholding on supplemental wages — Form 941-X is the correction tool. For over-withholding, the employer must reimburse the employee in the same calendar year the wages were paid before filing the correction. For under-withholding, the employer adjusts future pay periods.
Nine States Where Supplemental Wages Dodge State Tax
Nine U.S. states impose no state income tax on wages — regular or supplemental. If an employee works in one of these states, the employer only needs to withhold federal income taxes on supplemental wage payments:
- Alaska
- Florida
- Nevada
- New Hampshire
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
Employers in these states still must withhold federal income tax, Social Security tax (6.2% each for employer and employee), and Medicare tax (1.45% each). The state-level exemption only removes the state income tax layer. An employee in Texas who receives a $10,000 bonus still faces the 22% federal flat rate — they just avoid the additional state bite.
New Hampshire and Washington deserve a closer look. New Hampshire has no wage tax but historically taxed interest and dividends (that tax is being phased out by 2027). Washington has no income tax on wages but does impose a separate capital gains tax on high earners. Neither of these additional taxes applies to supplemental wages.
State Rates That Surprise Employers at Tax Time
States that do tax income often apply their own flat rate to supplemental wages — separate from their regular income tax brackets. These rates vary widely, and an employer operating in multiple states must track each one.
| State | Supplemental Wage Withholding Rate |
|---|---|
| California (bonuses/stock options) | 10.23% |
| California (other supplemental wages) | 6.6% |
| Oregon | 8.0% flat rate |
| New York | Uses regular withholding tables |
| Illinois | 4.95% flat rate |
California is one of the most complex states. It applies a 10.23% flat rate on bonuses and stock options but only 6.6% on other types of supplemental wages like overtime, back pay, and commissions. An employer who applies the wrong California rate to a bonus check will either under-withhold (triggering penalties) or over-withhold (frustrating the employee).
States like New York do not offer a separate supplemental wage flat rate. Employers must use the same withholding tables they apply to regular wages, which means supplemental wages get taxed at the employee’s marginal state rate. This can result in higher state withholding on a large bonus compared to states that allow a flat rate.
Three Scenarios That Show How the Rules Play Out
Scenario 1: The Year-End Bonus
Sarah is a marketing manager earning $75,000 per year in Texas. Her employer pays her a $6,000 year-end bonus on a separate check in December.
| Payment Detail | Tax Impact |
|---|---|
| Bonus amount | $6,000 |
| Federal withholding (22% flat rate) | $1,320 |
| State income tax | $0 (Texas has no state income tax) |
| Social Security tax (6.2%) | $372 |
| Medicare tax (1.45%) | $87 |
| Net bonus payment | $4,221 |
Sarah’s employer chose the flat rate method because the bonus was paid on a separate check. Texas imposes no state income tax, so Sarah avoids that layer entirely. Her total tax bite on the $6,000 bonus is $1,779 — roughly 30% of the gross amount.
Scenario 2: The Big Commission in California
Derek is a software sales rep in California earning a $90,000 base salary. In March, he closes a major deal and earns a $50,000 commission paid separately from his regular paycheck.
| Compensation Event | Withholding Result |
|---|---|
| Commission amount | $50,000 |
| Federal withholding (22% flat rate) | $11,000 |
| California state withholding (6.6%) | $3,300 |
| Social Security tax (6.2%) | $3,100 |
| Medicare tax (1.45%) | $725 |
| Net commission payment | $31,875 |
Derek loses over $18,000 in withholding from a single commission check. California applies its 6.6% rate on commissions (not the higher 10.23% rate, which is reserved for bonuses and stock options). Derek may get some of this back when he files his annual return if his actual tax liability is lower than the total withheld.
Scenario 3: The Executive Severance Package
Linda is a VP at a tech company in New York who gets laid off. Her severance package totals $1,200,000, paid as a lump sum. She received no other supplemental wages during the calendar year.
| Severance Component | Tax Treatment |
|---|---|
| First $1,000,000 | 22% federal flat rate ($220,000) |
| Remaining $200,000 | 37% mandatory rate ($74,000) |
| New York state withholding | Calculated at marginal rate (~$70,000+) |
| Social Security (up to $184,500 wage base) | $11,439 (6.2%) |
| Medicare (1.45%, no cap) | $17,400 |
| Estimated total withholding | $392,839+ |
Linda takes home roughly $807,000 of her $1.2 million severance before any additional deductions. The 37% mandatory rate on the $200,000 above $1 million costs her an extra $74,000 compared to what the 22% rate would have produced ($44,000). That $30,000 difference hits hard.
What the Supreme Court Said About Taxing Severance
The question of whether severance pay counts as taxable wages reached the U.S. Supreme Court in United States v. Quality Stores, Inc., 572 U.S. 141 (2014). Quality Stores, a bankrupt agricultural company, argued that severance payments to terminated employees should be exempt from FICA taxes (Social Security and Medicare) under IRC §3402(o).
The Supreme Court ruled unanimously against Quality Stores. The Court held that severance payments made to employees who are involuntarily terminated are taxable wages for FICA purposes. The payments were made in connection with the employer-employee relationship and were tied directly to service — which makes them wages under IRC §3121(a).
This ruling closed the door on employer arguments that severance pay is a type of supplemental unemployment compensation benefit exempt from FICA. After Quality Stores, severance is subject to both federal income tax withholding (at the 22% or 37% supplemental rate) and FICA taxes. Employers who fail to withhold FICA on severance payments risk back-tax assessments, penalties, and interest from the IRS.
Expensive Mistakes That Put Employers on the IRS Radar
Getting supplemental wage withholding wrong costs real money. The IRS imposes penalties for under-withholding, late deposits, and incorrect reporting. These are the most common errors employers make.
Mistake #1: Treating gift cards as de minimis fringe benefits. The IRS is crystal clear that cash and cash equivalents — including gift cards of any amount — are never excludable as de minimis benefits. A $10 coffee shop gift card is taxable supplemental income. Employers who skip withholding on gift cards owe back taxes plus penalties.
Mistake #2: Using the flat rate method when the employee has no regular wage withholding. If an employee’s W-4 produces zero federal income tax withholding from regular pay, the employer cannot use the 22% flat rate on supplemental wages. The IRS requires the aggregate method in this situation. Ignoring this rule leads to incorrect withholding.
Mistake #3: Failing to track the $1 million threshold across multiple payments. An employee might receive several bonuses, commissions, and other supplemental payments throughout the year. The $1 million limit is a running total. An employer who forgets to switch to 37% after the employee crosses $1 million faces mandatory rate penalties.
Mistake #4: Running an old relocation policy that treats moving expenses as tax-free. P.L. 119-21 permanently eliminated the moving expense exclusion for civilian employees. Employers who still reimburse relocation costs without withholding are creating unreported taxable income for their workers.
Mistake #5: Applying the wrong state supplemental rate. California’s dual-rate system (10.23% for bonuses, 6.6% for other supplemental wages) trips up employers who apply a single rate to all supplemental payments. Each state has its own rules, and multi-state employers must track every one of them.
Do’s and Don’ts for Handling Supplemental Wages
| Do | Why |
|---|---|
| Track supplemental wages separately from regular wages | Allows you to choose the flat rate method and simplifies IRS reporting |
| Monitor each employee’s year-to-date supplemental total | Ensures you switch to 37% the moment they cross $1 million |
| Require receipts and timely accounting under your accountable plan | Keeps reimbursements tax-free and avoids reclassification |
| Communicate withholding methods to employees before payment | Reduces confusion and complaints when net pay looks smaller than expected |
| Verify state-specific supplemental rates wherever you operate | Prevents under-withholding penalties in states like California and Oregon |
| Use Form 941-X promptly to correct withholding errors | Limits penalty exposure and keeps your quarterly filings accurate |
| Don’t | Why |
|---|---|
| Don’t treat gift cards as non-taxable perks | Cash equivalents are always taxable — the IRS makes no exceptions |
| Don’t use the 22% flat rate when the employee has zero regular withholding | The IRS mandates the aggregate method in this specific situation |
| Don’t ignore the $1 million threshold mid-year | Failing to switch to 37% triggers mandatory penalties |
| Don’t reimburse moving expenses tax-free for civilian employees | The general exclusion was permanently eliminated by P.L. 119-21 |
| Don’t assume all states follow federal supplemental wage rules | Many states have their own flat rates, brackets, or no income tax at all |
| Don’t skip FICA withholding on severance payments | United States v. Quality Stores confirmed severance is subject to FICA |
Weighing the Pros and Cons of Supplemental Pay
| Pros of Offering Supplemental Wages | Cons of Offering Supplemental Wages |
|---|---|
| Boosts employee motivation — Bonuses and commissions drive performance | Increases payroll complexity — Separate withholding rules require extra tracking |
| Attracts top talent — Competitive supplemental pay packages help recruiting | Creates employee confusion — Workers often don’t understand why their bonus check looks smaller |
| Flexible cost structure — Commissions and bonuses tie labor costs to revenue | Triggers higher withholding rates — The 22% flat rate often withholds more than the employee’s actual tax bracket |
| Rewards loyalty — Severance and PTO payouts show employees they’re valued | $1 million threshold risk — High earners face a sudden jump to 37% withholding |
| Tax-free options exist — De minimis perks and accountable plans provide some relief | State-by-state compliance burden — Multi-state employers must track different rules for each jurisdiction |
| Deductible business expense — Supplemental wages are tax-deductible for the employer | Audit exposure — Incorrect withholding or classification invites IRS scrutiny |
FAQs
Are bonuses considered supplemental wages?
Yes. The IRS classifies bonuses as supplemental wages subject to either the 22% flat withholding rate or the aggregate method, depending on how the employer pays them.
Can I avoid taxes on my bonus?
No. Federal law requires employers to withhold income tax on bonuses. You may receive a refund when filing your return if too much was withheld throughout the year.
Is overtime pay a supplemental wage?
Yes. The IRS treats overtime as a supplemental wage because it varies from paycheck to paycheck based on extra hours worked, not a fixed schedule.
Do all states tax supplemental wages?
No. Nine states — Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming — impose no state income tax on wages.
Can gift cards be tax-free fringe benefits?
No. The IRS states that cash and cash equivalents, including gift cards of any dollar amount, are never excludable as de minimis fringe benefits.
Is severance pay subject to FICA taxes?
Yes. The Supreme Court ruled in United States v. Quality Stores (2014) that severance payments to terminated employees are taxable wages subject to FICA.
What is an accountable plan?
Yes, it’s a real IRS-recognized arrangement. It lets employers reimburse business expenses tax-free if the employee has a business connection, provides receipts, and returns excess amounts.
Can moving expenses still be reimbursed tax-free?
No — unless the employee is active-duty military or an intelligence community member moving for a reassignment. P.L. 119-21 permanently eliminated the civilian exclusion.
Does the 37% rate apply to all supplemental wages?
No. The 37% mandatory rate applies only to supplemental wages exceeding $1 million in a single calendar year. Wages below that threshold use the 22% rate.
Can an employee claim exempt on supplemental wages?
No. An employee’s W-4 “exempt” status does not override the mandatory flat rate withholding rules for supplemental wages, especially the 37% rate above $1 million.
Are employer contributions to Trump accounts taxable?
No. Beginning July 4, 2026, employer contributions up to $2,500 per year to a qualifying Trump account are excluded from the employee’s gross income under P.L. 119-21.
Can I use the flat rate method for every supplemental payment?
No. If the employee has zero federal income tax withheld from regular wages, the IRS requires the aggregate method for supplemental wage withholding.
Related reading
- Are Workers Compensation Indemnity Payments Taxable? (w/Examples) + FAQs
- Are Disability Insurance Benefits Taxable? (w/Examples) + FAQs
- Can You Be Exempt From FICA? (w/Examples) + FAQs
- Is Supplemental Income Taxed Differently? (w/Examples) + FAQs
- How Do Supplemental Retirement Plans Work? (w/Examples) + FAQs
- Who Is Exempt From a W-4? (w/Examples) + FAQs
- Does Washington Tax Overtime? (w/Examples) + FAQs