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. 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 can treat it as supplemental wages. These wages generally include commissions and bonuses, sick leave payments, 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 all of the following three requirements are met, your expense reimbursements are supplemental wages subject to supplemental tax withholding rates:
- First, the business expense must be deductible if your employer fails to reimburse you.
- Second, you must provide proof, like a receipt, of the expense to your employer.
- Finally, if your employer pays you an allowance or reimbursement that exceeds your actual expense, you must refund the excess.
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 39.6%).
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 25 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.