Wages are remuneration or compensation that an employer pays to an employee for services rendered. Wages can be in the form of cash, check, direct deposit or the reasonable value of non-cash payments. Payments made in addition to the employee’s ordinary wages are called “supplemental wages.” Specific rules apply to supplemental wages.
Supplemental wages include bonuses, commissions, severance pay, overtime pay, taxable fringe benefits such as unused vacation or sick pay, awards, back pay, and retroactive pay -- wages for past services due at a new pay rate. The withholding procedures for federal income tax depend on various factors.
Less Than $1 Million
If an employee receives less than $1 million in supplemental wages for the year, the employer can withhold federal income tax one of two ways. If he pays the supplemental wages with the employee’s regular wages and does not list each one separately, he can withhold federal income tax as though it were a single payment for the pay period. If he pays supplemental wages as a separate check from the employee’s regular wages, or if he pays it on the same check but specifies the amount of each, he can withhold federal income tax at a flat 25 percent.
More Than $1 Million
If the employee receives a supplemental wage payment combined with other supplemental payments that exceed $1 million for the year, the employer withholds federal income tax at 35 percent on the excess amount. An amount of $1 million or less is subject to withholding as shown in the preceding section.
Like regular wages, vacation pay is subject to federal income tax. The employer treats vacation pay as supplemental wages if the vacation pay is in addition to regular wages for the vacation period. Vacation pay that surpasses the time frame of a regular pay period can be paid over the course of several pay periods.
For tipped employees, such as waiters or busboys, the employer treats tips as supplemental wages if the employee receives wages plus tips. If the employer did not withhold income tax from the regular wages, she adds the tips to the regular wages and then withholds as a total payment. If she withheld income tax from the regular wages, she can withhold on the tips at a flat 25 percent.
Supplemental wages are also subject to Social Security and Medicare taxes. An employer can obtain the guidelines for federal withholding on supplemental wages from IRS Circular E.
The employer should check with his state revenue agency, which might have its own tax withholding requirements for supplemental wages; and with his state labor department, which might include provisions for certain supplemental wages. For example, state law might have a time frame for when overtime wages should be paid; this time frame might differ from when regular wages are due.