Yes, supplemental income is taxed differently — but the difference is in how your employer withholds taxes from that income, not in how the IRS ultimately taxes it. Under Section 7 of IRS Publication 15, employers must withhold federal income tax on supplemental wages at a flat 22% rate for amounts up to $1 million per year, and a mandatory 37% rate on anything above $1 million. These rates were permanently locked in by P.L. 119-21, the One Big Beautiful Bill Act, which extended the individual tax rates from the Tax Cuts and Jobs Act. The IRS collected over $4.7 trillion in gross taxes in fiscal year 2023, with individual income tax withholding making up the largest share — and supplemental wages play a major role in that number.
- 💰 How supplemental wages are defined under federal law — and which payments qualify
- 📊 The two IRS withholding methods (flat rate vs. aggregate) — broken down with real dollar examples
- 🏛️ How each state handles supplemental wage taxes — including states that charge nothing
- ⚠️ The most common mistakes employees and employers make with supplemental income
- ✅ Actionable do’s and don’ts to keep more of your bonus, commission, or severance pay
What Counts as Supplemental Income Under Federal Law
The IRS does not treat all income the same. Supplemental wages are payments an employer makes to an employee on top of their regular salary or hourly pay. The IRS defines supplemental wages in Publication 15-A as compensation that is not part of an employee’s standard payroll.
These payments include a wide range of income types. Bonuses, commissions, overtime pay, severance pay, back pay, taxable fringe benefits, retroactive pay increases, and awards or prizes all fall under the supplemental wage umbrella. Even accumulated sick leave payouts and certain expense reimbursements count if they do not meet the IRS’s “accountable plan” rules.
The distinction matters because the withholding rules change based on whether income is “regular” or “supplemental.” If your employer pays you a flat $5,000 salary every two weeks, that is a regular wage. If your employer then hands you a $3,000 year-end bonus on a separate check, that $3,000 is a supplemental wage — and different withholding rules apply.
| Regular Wages | Supplemental Wages |
|---|---|
| Salary, hourly pay | Bonuses, commissions |
| Based on W-4 withholding elections | Subject to flat 22% or aggregate method |
| Predictable, recurring payments | Irregular or one-time payments |
| Standard payroll tax tables apply | Special IRS withholding rules apply |
Why the IRS Treats Supplemental Wages Differently
The IRS requires special withholding methods for supplemental wages because these payments are irregular. Your employer sets up your regular paycheck withholding based on your Form W-4. That form assumes a steady, predictable income across the year.
A lump-sum bonus or commission throws off that calculation. Without special rules, your employer would either withhold too little — leaving you with a surprise tax bill in April — or withhold too much by treating the combined amount as if you earn that inflated sum every pay period. The IRS supplemental wage rules exist to prevent both of these outcomes.
Under IRC Section 3402, employers have a legal obligation to withhold income taxes from wages. The penalty for failing to withhold the correct amount can fall on the employer through the trust fund recovery penalty, which makes responsible persons personally liable for unpaid employment taxes. This is not a technicality — the IRS aggressively pursues this penalty.
The Two Federal Withholding Methods Explained
Employers have two options when withholding federal income tax from supplemental wages. The IRS calls them the percentage method (flat rate) and the aggregate method. The choice of method rests with the employer, not the employee — though employees can adjust their W-4 to influence overall withholding.
How the Flat Rate Method Works
The flat rate method is the simpler of the two. Your employer identifies the supplemental payment as separate from your regular wages and withholds a flat 22% for federal income tax. No W-4 information is needed for this calculation.
Here is how it works on a $10,000 bonus:
| Bonus Amount | Federal Tax Withheld (22%) |
|---|---|
| $10,000 | $2,200 |
That $2,200 goes straight to the IRS as a federal income tax prepayment. Your employer also withholds 6.2% for Social Security and 1.45% for Medicare on top of the 22%, plus any applicable state taxes.
The flat rate method is popular because it is easy for payroll departments to calculate. There is no need to look at the employee’s W-4, filing status, or other deductions. The employer applies 22% and moves on.
How the Aggregate Method Works
The aggregate method is more complex but can sometimes result in different withholding amounts. Your employer combines your supplemental wages with your regular wages for the pay period and treats the entire amount as a single payment. The employer then calculates withholding on that combined total using the standard tax tables and your W-4 information.
After calculating total withholding on the combined amount, the employer subtracts what would have been withheld on your regular wages alone. The remaining amount is the tax withheld from your supplemental pay. This method often results in higher upfront withholding because the combined amount pushes your income into a higher bracket for that pay period.
Imagine you earn $3,000 per biweekly pay period and receive a $5,000 bonus:
| Step | Calculation |
|---|---|
| Combined wages for the period | $3,000 + $5,000 = $8,000 |
| Withholding on $8,000 (using W-4 and tax tables) | $1,350 (example) |
| Withholding on $3,000 alone | $350 (example) |
| Tax withheld from the $5,000 bonus | $1,350 − $350 = $1,000 |
In this example, the aggregate method withholds $1,000 on a $5,000 bonus (an effective rate of 20%). The flat rate method would have withheld $1,100 (22% of $5,000). The difference depends entirely on your income level, W-4 elections, and filing status.
How the $1 Million Threshold Changes Everything
The IRS draws a hard line at $1 million in supplemental wages per calendar year. Once your total supplemental wages from a single employer cross that threshold, the employer must withhold at 37% on every dollar above $1 million. There is no choice between methods at this level — the 37% rate is mandatory.
This rule targets high earners who receive large bonuses, stock awards, or executive compensation packages. The 37% rate matches the top federal income tax bracket, which P.L. 119-21 permanently set at 37% for taxable income above $626,350 (single filers) and $751,600 (married filing jointly) for 2026.
| Supplemental Wages | Federal Withholding Rate |
|---|---|
| $0 – $1,000,000 | 22% (flat) or aggregate method |
| Above $1,000,000 | 37% (mandatory) |
Consider an executive who receives a $1.5 million bonus. The first $1 million is subject to 22% withholding ($220,000). The remaining $500,000 is subject to 37% withholding ($185,000). Total federal income tax withheld: $405,000 — and that does not include FICA or state taxes.
Supplemental Wages and FICA Taxes
Federal income tax is not the only tax that hits supplemental wages. Social Security and Medicare taxes (FICA) apply to bonuses, commissions, severance, and every other form of supplemental pay.
For 2026, the Social Security tax rate is 6.2% on wages up to the annual wage base of $184,500. Once your total wages (regular plus supplemental) exceed that cap, no more Social Security tax is withheld. The Medicare tax rate is 1.45% with no wage cap — and an additional 0.9% Medicare surtax kicks in on wages above $200,000 for single filers.
Here is a breakdown for a $10,000 bonus paid to an employee who has not yet hit the Social Security wage cap:
| Tax | Rate | Amount Withheld |
|---|---|---|
| Federal income tax | 22% | $2,200 |
| Social Security | 6.2% | $620 |
| Medicare | 1.45% | $145 |
| Total federal withholding | 29.65% | $2,965 |
That is nearly 30% gone before any state or local taxes are applied. Many employees see their bonus check and assume they are being “overtaxed.” The reality is that multiple taxes stack on top of each other, and withholding is not the same as your final tax liability.
State Supplemental Tax Rates: Where You Work Matters
Federal taxes are only part of the picture. Most states impose their own income tax on supplemental wages, and state supplemental rates vary widely across the country. Some states publish a specific flat rate for supplemental wages. Others require employers to use the standard state wage tables (the aggregate approach). Nine states impose no state income tax on wages at all.
States With the Highest Supplemental Rates
New York charges 11.7% on supplemental wages at the state level — and employees who live or work in New York City face an additional local income tax on top of that. California imposes a 10.23% rate on bonuses and stock compensation (and 6.6% on other supplemental wages). Oregon withholds at 8%.
States With No Income Tax on Wages
Nine states do not tax wage income at all: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Employees in these states only deal with federal supplemental withholding and FICA. This can make a meaningful difference — a $10,000 bonus in Texas keeps roughly $1,000 more than the same bonus in California.
Key State Supplemental Rates at a Glance
| State | Supplemental Rate |
|---|---|
| California | 10.23% (bonus/stock) |
| New York | 11.7% (plus local) |
| Oregon | 8.0% |
| Minnesota | 6.25% |
| Maryland | 6.5% (plus local) |
| Virginia | 5.75% |
| Pennsylvania | 5.99% |
| North Carolina | 4.09% |
| Ohio | 2.75% |
| Texas | No state income tax |
Three Real-World Scenarios With Dollar Examples
Scenario 1: Maria Gets a $5,000 Year-End Bonus in California
Maria earns $75,000 per year as a marketing manager in Los Angeles. In December, her employer gives her a $5,000 bonus on a separate check using the flat rate method.
| Deduction | Amount Withheld |
|---|---|
| Federal income tax (22%) | $1,100 |
| California state tax (10.23%) | $511.50 |
| Social Security (6.2%) | $310 |
| Medicare (1.45%) | $72.50 |
| Total withheld | $1,994 |
Maria takes home $3,006 out of her $5,000 bonus. She has not been “taxed at 40%.” Her employer has withheld about 39.88% to prepay her tax obligations. When Maria files her return, her actual tax rate on that income depends on her total earnings, deductions, and credits. If too much was withheld, she gets a refund.
Scenario 2: James Earns $30,000 in Commissions in Texas
James works as a car salesperson in Houston. He earns a $40,000 base salary plus commissions. This year, he earns $30,000 in commissions, paid monthly as supplemental wages.
| Deduction | Amount Withheld |
|---|---|
| Federal income tax (22%) | $6,600 |
| Texas state tax | $0 |
| Social Security (6.2%) | $1,860 |
| Medicare (1.45%) | $435 |
| Total withheld | $8,895 |
James keeps $21,105 of his $30,000 in commissions. Because Texas has no state income tax, James saves thousands compared to someone earning the same commissions in New York or California. His commissions are treated as supplemental wages under IRS rules.
Scenario 3: Dana Receives $15,000 in Severance After a Layoff in New York
Dana loses her job at a financial firm in Manhattan. Her employer pays $15,000 in severance on her final paycheck. Severance pay is classified as supplemental wages and is subject to federal income tax, FICA, and state and local taxes.
| Deduction | Amount Withheld |
|---|---|
| Federal income tax (22%) | $3,300 |
| New York state tax (11.7%) | $1,755 |
| NYC local income tax (~3.876%) | $581.40 |
| Social Security (6.2%) | $930 |
| Medicare (1.45%) | $217.50 |
| Total withheld | $6,783.90 |
Dana takes home roughly $8,216 of her $15,000 severance. The combined federal, state, and local withholding rate exceeds 45%. This is one of the steepest supplemental wage withholding environments in the country.
Overtime and Tips: New Deductions Under P.L. 119-21
The One Big Beautiful Bill Act (P.L. 119-21) introduced two new deductions that directly affect supplemental wages for tax years 2025 through 2028. These changes apply to qualified overtime and qualified tips.
Qualified Overtime Compensation
Employees can now deduct up to $12,500 ($25,000 for married filing jointly) of qualified overtime compensation from their taxable income. Qualified overtime is the premium portion of overtime pay — the “half” in time-and-a-half — required under Section 7 of the Fair Labor Standards Act (FLSA). This deduction reduces taxable income, which can lower the employee’s final tax bill.
Employees must submit an updated Form W-4 to their employer to adjust their withholding and receive the benefit in their paychecks. Without the updated W-4, the employee would need to wait until filing their annual return to claim the deduction.
Qualified Tips
Employees in tipped occupations can deduct up to $25,000 of qualified cash tips from their taxable income. Qualified tips include voluntary cash or charged tips received from customers. Mandatory service charges are not qualified tips under this provision.
Tips remain subject to Social Security and Medicare taxes if the employee receives $20 or more per month in tips. The income tax deduction only reduces federal income tax — it does not eliminate FICA obligations.
Form W-4 and Your Supplemental Wages
Your Form W-4 plays a critical role in how supplemental wages are taxed — but only when the aggregate method is used. Under the flat rate method, your employer ignores your W-4 entirely and applies the straight 22% rate. Under the aggregate method, your W-4 elections directly influence how much is withheld from your bonus or commission.
Employees who expect large supplemental payments can adjust their W-4 to account for the extra income. The IRS provides a Tax Withholding Estimator that helps employees calculate the right amount. Filing a new W-4 with additional withholding in Step 4(c) can prevent a surprise tax bill in April.
If you claim too many deductions or credits on your W-4, your regular paycheck withholding drops — but any supplemental wages taxed at the flat 22% rate remain unaffected. This mismatch catches many taxpayers off guard. The safest approach is to use the IRS estimator tool after receiving any large supplemental payment.
Key IRS Forms Involved in Supplemental Wage Reporting
Multiple forms interact when supplemental wages are paid, reported, and reconciled.
Form W-2 is where supplemental wages ultimately appear. Your employer reports your total wages — both regular and supplemental — in Box 1 (wages, tips, other compensation). Supplemental wages are not broken out in a separate box. This means you cannot look at your W-2 and see exactly how much was supplemental vs. regular.
Form W-4 controls your withholding elections. Employees who receive large commissions or expect bonuses should review their W-4 at least once a year. The IRS allows you to submit a new W-4 at any time.
Form 941 is the employer’s quarterly tax return. Employers report all withheld income taxes, Social Security, and Medicare taxes on this form — including amounts withheld from supplemental wages. The IRS matches the totals on Form 941 to the combined amounts on all W-2s issued by the employer.
Form 1040 is where everything is reconciled at tax time. Your supplemental wages are lumped into your total income, and your actual tax is calculated based on your filing status, deductions, and credits. If your employer withheld more than you owe, you receive a refund. If less was withheld, you owe the difference.
Withholding Is Not Your Final Tax Bill
This is the single most misunderstood concept about supplemental income. The 22% flat rate (or whatever your aggregate withholding rate is) is not your actual tax rate on that income. It is a prepayment toward your annual tax obligation.
Your actual tax rate depends on your total taxable income for the year. If you earn $60,000 in regular wages and receive a $5,000 bonus, the IRS taxes your total income of $65,000 based on the standard federal brackets. The bonus is not taxed at a separate “bonus tax rate.” It is taxed at your marginal rate.
| Taxable Income (Single, 2026) | Federal Tax Rate |
|---|---|
| $0 – $11,925 | 10% |
| $11,926 – $48,475 | 12% |
| $48,476 – $103,350 | 22% |
| $103,351 – $197,300 | 24% |
| $197,301 – $250,525 | 32% |
| $250,526 – $626,350 | 35% |
| Over $626,350 | 37% |
If your total taxable income puts you in the 12% bracket but your employer withheld 22% from your bonus, you overpaid on that bonus. You will receive the difference as a refund when you file your Form 1040. The reverse is also true — if you are in the 32% bracket, the 22% withholding was not enough, and you will owe the difference.
How Employers Decide Which Method to Use
Employers are not required to use one method over the other (below the $1 million threshold). Most large companies use the flat rate method because it is simpler for payroll processing. The flat rate method does not require the payroll system to look up each employee’s W-4 and run aggregate calculations.
Smaller employers sometimes use the aggregate method because their payroll systems automatically combine all wages for a pay period. If your bonus is paid on the same paycheck as your regular wages and is not separately identified, the aggregate method applies by default.
Employees have no legal right to demand one method over another. You cannot walk into HR and insist that your employer use the flat rate method. You can ask, and some employers will accommodate the request. Your only direct control is through your Form W-4 withholding elections.
Mistakes to Avoid With Supplemental Income
Assuming Your Bonus Is “Taxed at 40%”
Many employees see a $5,000 bonus check with $2,000 in deductions and assume the government took 40%. The truth is that the 22% federal rate, plus 6.2% Social Security, 1.45% Medicare, and state taxes all stack together. Your actual tax rate on that income is determined when you file your return — and you may get money back.
Forgetting to Update Your W-4 After a Large Bonus
If you receive a significant commission or bonus, your tax situation changes. Failing to adjust your W-4 can lead to underwithholding on your regular paychecks for the rest of the year. The IRS may assess an underpayment penalty if you owe too much at tax time.
Ignoring State and Local Taxes
Employees who move between states or work remotely may not realize that the state where they work (not where they live) often determines the supplemental withholding rate. A remote worker in New York earning a bonus from a Florida-based company may still owe New York state taxes on that bonus.
Treating Severance Pay as Non-Taxable
Some employees assume that severance is a “gift” or not subject to taxes. Under IRS rules, severance pay is a supplemental wage and is subject to full federal income tax withholding, Social Security, Medicare, and applicable state taxes.
Not Planning for the $1 Million Threshold
Executives and high-commission earners who approach $1 million in supplemental wages during a single calendar year should plan ahead. Once you cross that line, the 37% mandatory rate kicks in on every additional dollar — a 15-percentage-point jump from the 22% rate on the first $1 million.
Misclassifying Payments as Non-Supplemental
Employers who fail to correctly classify payments as supplemental wages risk IRS penalties. Taxable fringe benefits, back pay, retroactive raises, and non-accountable expense reimbursements are all supplemental wages. Misclassification can trigger audits and the trust fund recovery penalty.
Do’s and Don’ts for Supplemental Income
| Do’s | Don’ts |
|---|---|
| Do review your W-4 after receiving a large bonus or commission — this prevents underwithholding for the rest of the year | Don’t assume the 22% withholding rate is your final tax rate — your actual rate depends on your total annual income |
| Do use the IRS Tax Withholding Estimator to check if your withholding is on track after receiving supplemental pay | Don’t ignore state supplemental tax rates — some states like New York and California add over 10% in additional withholding |
| Do keep records of how your employer classified each payment (bonus, commission, severance) for accurate tax filing | Don’t treat severance pay as tax-free — the IRS classifies it as supplemental wages subject to full withholding |
| Do ask your HR or payroll department which withholding method they use (flat rate vs. aggregate) so you can plan accordingly | Don’t wait until April to find out you owe thousands — check your withholding after any major supplemental payment |
| Do set aside a portion of any large commission or bonus in a savings account to cover potential tax shortfalls | Don’t forget about FICA — Social Security (6.2%) and Medicare (1.45%) apply to supplemental wages on top of income tax |
Pros and Cons: Flat Rate Method vs. Aggregate Method
| Flat Rate Method | Aggregate Method |
|---|---|
| Pro: Simple to calculate — flat 22% on any bonus under $1M | Pro: May result in lower withholding for lower-income employees whose aggregate bracket is below 22% |
| Pro: No W-4 information needed for the supplemental payment | Pro: Accounts for the employee’s actual tax situation based on their W-4 |
| Pro: Predictable — employees know exactly what to expect | Pro: Reduces the chance of a large refund or balance due at filing |
| Con: May overwithhold for employees in the 10% or 12% bracket | Con: Complex for payroll departments to calculate |
| Con: May underwithhold for employees in the 32%, 35%, or 37% bracket | Con: Can cause sticker shock — the combined wages may push withholding very high for that pay period |
Vacation Pay, Back Pay, and Retroactive Raises
Not all supplemental wages come in the form of bonuses or commissions. Vacation pay is treated as supplemental wages when paid in addition to regular wages — for example, when an employee cashes out unused vacation time. If vacation pay is simply paid during a scheduled vacation, it is treated as regular wages.
Back pay — wages owed for prior work periods — is classified as supplemental wages. If a court orders an employer to pay back wages after a labor dispute, the employer must withhold taxes using the supplemental wage rules. The same applies to retroactive pay increases. If your employer gives you a raise effective three months ago and issues a lump-sum adjustment, that lump sum is a supplemental wage.
Taxable fringe benefits also count. Employer-provided personal use of a company car, gym memberships, or gifts above the IRS de minimis threshold are supplemental wages. The employer must include the value in the employee’s income and withhold accordingly.
How Supplemental Income Affects Your Tax Bracket
A common fear is that a bonus will “push you into a higher tax bracket” and result in paying more taxes on all your income. This is a myth. The U.S. federal income tax system uses progressive (or marginal) tax brackets. Only the portion of income that falls within a higher bracket is taxed at the higher rate.
If you earn $95,000 in regular wages and receive a $10,000 bonus, only the income above the 22% bracket threshold ($103,350 for single filers in 2026) is taxed at the next rate. The first $103,350 is still taxed at the same rates as before. Your bonus does not retroactively increase the tax rate on your entire salary.
The confusion arises from withholding, not from the actual tax code. The aggregate method can make it appear as though your entire paycheck is taxed at a higher rate, because your combined wages for that pay period are treated as if you earn that amount every period. This inflated projection leads to higher withholding — but the math is corrected when you file your return.
Employer Reporting Obligations and Penalties
Employers carry significant responsibility when it comes to supplemental wage taxes. Under IRS Publication 15, employers must correctly identify supplemental wages, choose an appropriate withholding method, deposit withheld taxes on time, and report the amounts accurately on Forms 941 and W-2.
Failure to withhold the correct amount can trigger the trust fund recovery penalty under IRC Section 6672. This penalty makes individual “responsible persons” — such as business owners, CFOs, and payroll managers — personally liable for the unpaid taxes, plus penalties and interest. The IRS does not limit this penalty to the business entity.
Employers must deposit withheld taxes either monthly or semiweekly, depending on the size of their payroll. Late deposits trigger penalties ranging from 2% to 15% of the underpaid amount, depending on how late the payment is. The IRS requires all deposits to be made by electronic funds transfer through EFTPS.
When Supplemental Wages Are Combined With Regular Pay
If an employer pays a bonus alongside regular wages on the same paycheck and does not separately identify the supplemental portion, the entire payment is treated as regular wages. The employer uses the standard tax tables and the employee’s W-4 to calculate withholding on the full amount.
This approach can result in significantly higher withholding for that pay period. The payroll system sees the inflated total and projects it as if the employee earns that amount every period. For an employee who normally earns $2,500 per biweekly pay period and receives a $7,500 bonus on the same check, the system calculates withholding as if the employee earns $10,000 every two weeks — an annualized salary of $260,000.
The employee does not lose money in the long run. The excess withholding is refunded when the employee files their tax return. But the short-term cash flow impact can be painful, especially for employees who are counting on the bonus for a specific expense.
How to Reduce Withholding on Your Supplemental Income
You cannot control whether your employer uses the flat rate or aggregate method. But you can take steps to minimize the withholding impact.
Adjust your W-4. If you know you will receive a large bonus, submit a new W-4 before the bonus is paid. Increasing your deductions or claiming additional credits on the W-4 can reduce aggregate method withholding. Be careful not to over-adjust — underwithholding can lead to penalties.
Ask for a separate check. If your employer pays bonuses on the same check as regular wages, ask if they can issue the bonus as a separate payment. This allows the employer to use the flat 22% method instead of the aggregate method, which can sometimes reduce withholding.
Max out retirement contributions. Contributions to a 401(k) or 403(b) plan reduce your taxable wages before withholding is calculated. If you increase your contribution percentage before a bonus is paid, less of the bonus is subject to income tax withholding. Social Security and Medicare taxes still apply to the full gross amount.
Time the payment. If you have any influence over when a bonus is paid, consider whether receiving it in January vs. December changes your tax situation. Pushing income into a new calendar year can keep you below the $1 million threshold or keep your total income in a lower bracket.
Relevant Court Rulings and IRS Guidance
The legal framework for supplemental wage taxation has been shaped by several important rulings and regulatory actions.
In FICA Tax on Supplemental Wages, the Supreme Court ruled in United States v. Quality Stores, Inc. (2014) that severance payments made to employees who were involuntarily terminated are “wages” under FICA and subject to Social Security and Medicare taxes. The employer had argued that severance should be classified as “supplemental unemployment compensation benefits” exempt from FICA. The Court disagreed and held that the payments were taxable wages.
The IRS issued Revenue Ruling 2004-110, which clarified that back pay awards resulting from employment discrimination lawsuits are supplemental wages subject to income tax withholding. Employers who settle discrimination claims must withhold taxes from the wage portion of any settlement payment.
P.L. 119-21 (the One Big Beautiful Bill Act) permanently extended the 22%/37% supplemental withholding rates that were originally set to expire after 2025 under the Tax Cuts and Jobs Act. This eliminated the uncertainty that employers and employees faced about whether rates would revert to pre-2018 levels.
FAQs
Is overtime pay taxed as supplemental income?
Yes. Overtime pay is a supplemental wage under IRS rules and is subject to the 22% flat withholding rate or aggregate method, plus FICA and state taxes.
Are bonuses taxed at a higher rate than regular pay?
No. Bonuses are withheld at 22% (flat method), but your actual tax rate depends on total annual income. Excess withholding is refunded when you file.
Can I choose how my employer withholds tax on my bonus?
No. The employer selects the withholding method. You can influence withholding only by adjusting your Form W-4 elections.
Is severance pay subject to Social Security and Medicare taxes?
Yes. The Supreme Court confirmed in Quality Stores (2014) that severance payments are wages subject to full FICA taxes.
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.
Does the 22% flat rate apply to commissions?
Yes. Commissions are supplemental wages. If paid separately, the employer can withhold at the 22% flat rate or use the aggregate method.
Will I get a refund if too much was withheld from my bonus?
Yes. If total withholding exceeds your actual tax liability for the year, the IRS refunds the difference when you file your Form 1040.
Is the 37% supplemental rate only for millionaires?
No. It applies to anyone whose supplemental wages from one employer exceed $1 million in a single calendar year, regardless of total income.
Are tips taxed as supplemental wages?
Yes. The IRS treats tips as supplemental wages for withholding purposes. Tips remain subject to Social Security and Medicare if they exceed $20 per month.
Can I deduct overtime pay from my taxes under the new law?
Yes. P.L. 119-21 allows a deduction of up to $12,500 ($25,000 married filing jointly) for qualified overtime through tax year 2028. Submit an updated W-4 to your employer.
Related reading
- Are Workers Compensation Indemnity Payments Taxable? (w/Examples) + FAQs
- Are Hiring Bonuses Taxed? (w/Examples) + FAQs
- Can Supplemental Wages Be Tax Exempt? (w/Examples) + FAQs
- Are Supplemental Taxes Tax-Deductible? (w/Examples) + FAQs
- Are Supplemental Taxes Paid Every Year? (w/Examples) + FAQs
- How Do Supplemental Retirement Plans Work? (w/Examples) + FAQs
- Does Washington Tax Overtime? (w/Examples) + FAQs