What is the Federal Supplemental Tax Rate?
If you receive any form of supplemental wages during the year, your employer may be required to withhold tax using a different method.
- Potential additional withholding
- Supplemental wages
- When expense reimbursements are considered supplemental wages
Potential additional withholding
If you work as an employee, the amount of tax withheld from your paycheck is based upon the information you provided on Form W-4 and the amount of your wages. However, if you receive any form of supplemental wages during the year, your employer may be required to withhold tax using a different method.
If your employer pays you extra money, outside of your regular salary, the federal government typically treats this as supplemental wages. These wages generally include commissions and bonuses, any severance payments upon termination of your employment, taxable prizes and awards, retroactive pay increases, reimbursements of nondeductible moving expenses, taxable fringe benefits and certain kinds of expense reimbursements and allowances.
When expense reimbursements are considered supplemental wages
Unless an "Accountable Plan" for employee reimbursements, your expense reimbursements are likely supplemental wages subject to supplemental tax withholding rates. To be an accountable plan, the expense reimbursement arrangement must meet all of the following rules:
- Expenses must be incurred while performing services as an employee of the company and the reimbursement must be for the expenses and not wages.
- Second, you must be required to provide proof, like a receipt, of the expense to your employer within a reasonable time.
- Finally, if your employer pays you an allowance or reimbursement that exceeds your actual expense, you must be required to refund the excess within a reasonable time.
Supplemental wages tax rates
There are two different supplemental withholding rates that can apply, depending upon the amount of supplemental wages you receive during a single year and depending upon whether the supplemental wages are paid as a separate payment or paid with your regular wages.
Supplemental wages of more than $1 million
If your total annual supplemental wages are greater than $1 million, your employer must withhold tax on the amount over $1 million at the highest rate of income tax allowed by federal law (currently 37%).
Supplemental wages of $1 million or less
If your supplemental wages are $1 million or less, the withholding rate depends upon how your supplemental wages are paid.
- If your employer does not designate your pay as supplemental wages and includes it with your regular wages, the supplemental withholding rate does not apply and taxes are withheld using the information you provided on Form W-4.
- If your supplemental wages are identified separately from your salary (as a bonus, for example), your employer must withhold taxes using one of the following two methods:
- Withhold at the supplemental rate of 22 percent or
- Combine your regular wages for the pay period with your supplemental wages and treat the total as one payment of regular wages and then withhold taxes using ordinary withholding rates.
As with your normal tax withholding, if the total of your taxes paid exceeds your taxes due for the year, you can receive a tax refund when you file your tax return. Likewise, if your withholding is less than the amount of tax calculated when preparing your tax returns you will likely have to pay an additional amount due.
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