Basically, supplemental wages include a variety of items paid in addition to regular wages. Whereas regular wages constitute straight-time hourly pay or fixed salary, supplemental wages include:
Social Security and Medicare taxes. Withhold these two taxes from supplemental wages as you would regular wages.
Federal income tax. If the supplemental wages exceed $1 million for the year, withhold federal income tax on the amount over $1 million at the highest tax bracket of 37 percent. If the supplemental wages are less than $1 million, federal income tax withholding is based on whether the supplemental wages are paid with regular wages.
State and local income taxes. The rules for withholding state income tax from supplemental wages vary by state. For instance, Alabama has a supplemental tax rate of 5 percent. In New York, it's 9.62 percent. There may also be special rules, depending on the type of supplemental wage. For instance, in California the supplemental tax rate is 6.6 percent, except for bonuses and earnings from stock options — in which case the rate is 10.23 percent.
If the state doesn't charge an income tax on wages, no state income tax should come out of supplemental wages. Some states, such as Arizona and Connecticut, impose a state income tax but do not have a supplemental withholding rate. In these circumstances, supplemental wages are taxed at the same rate as regular wages are taxed.
If local income tax applies, withhold supplemental wages according to the rules of the local revenue agency. Also note that rates can change frequently, so keep a close eye on state and local rules and regulations.
Be sure to reach out to us if you have any questions about the supplemental wages you pay your employees.
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