Supplemental wage withholding for bonuses, commissions, and other extra pay.
Supplemental wages are taxable wages paid outside regular wages. Here is how federal supplemental wage withholding works, when the 22% optional flat rate can apply, and when the 37% mandatory rate takes over.
Try payroll tax quiz Practice calculationsWhat are supplemental wages?
Supplemental wages are wage payments that are not regular wages. IRS Publication 15 includes examples such as bonuses, commissions, overtime pay, payments for accumulated sick leave, severance pay, awards, prizes, back pay, reported tips, retroactive pay increases, and certain moving expense payments.
Bonus pay
A separately paid bonus is one of the most common supplemental wage examples.
Commissions
Commission payments may be supplemental wages when paid apart from regular wages.
Back pay and retro pay
Retroactive increases and back pay can create supplemental wage withholding questions.
Severance
Severance pay is generally treated as wages for employment tax purposes.
Two common withholding methods
When supplemental wages do not exceed $1 million for the employee during the calendar year, federal income tax withholding generally depends on how the payment is made and whether federal income tax was withheld from the employee’s regular wages in the current or preceding calendar year.
| Method | How it works | When it is commonly used |
|---|---|---|
| Optional flat rate | The employer withholds federal income tax from the supplemental wage payment at the flat supplemental rate, currently 22% for payments under the $1 million threshold. | Often used when supplemental wages are separately stated from regular wages and the employer has withheld income tax from regular wages in the current or prior year. |
| Aggregate method | The employer combines regular and supplemental wages, figures withholding as if the total were one wage payment, then subtracts tax already withheld from regular wages. | Used when the flat-rate method is not available or when the employer chooses to calculate withholding through the regular withholding method. |
The 22% optional flat rate
The 22% rate is a federal income tax withholding method, not a separate tax on bonuses. It is also not a guarantee that the employee’s final income tax liability will be exactly 22%. The employee’s final tax depends on the full tax return, filing status, income, deductions, credits, and other withholding.
That distinction matters in real payroll work: a high-income employee may owe additional tax if only 22% is withheld from a large bonus, while another employee may receive a refund depending on the rest of their tax picture.
The $1 million rule and 37% mandatory rate
If supplemental wages paid to an employee exceed $1 million during the calendar year, federal withholding changes for the excess amount. The excess supplemental wages are subject to mandatory flat-rate withholding at 37% for 2026. This rule applies without regard to the employee’s Form W-4.
Common exam and payroll traps
- The 22% rate is withholding, not the employee’s final tax rate.
- Regular Medicare tax and Social Security tax may still apply to supplemental wages, subject to normal wage-base rules.
- Additional Medicare Tax may apply when wages paid by an employer exceed $200,000 for the year.
- State withholding rules may differ from federal supplemental wage rules.
- Separately stated supplemental wages can produce a different withholding result than combined wage payments.
Simple bonus withholding example
An employee receives a separately paid $4,000 bonus. The employer is allowed to use the optional flat federal supplemental withholding rate and chooses to do so.
Federal income tax withholding: $4,000 x 22% = $880.
This example only shows federal income tax withholding on the bonus. It does not include Social Security tax, Medicare tax, Additional Medicare Tax, state taxes, local taxes, or deductions.
Use the supplemental wage calculator to estimate FICA, Additional Medicare Tax, and gross-up amounts on a bonus like this.
How supplemental wage withholding fits FPC and CPP study
For FPC prep, focus on recognizing supplemental wages, knowing the 22% optional flat rate, and understanding that supplemental wages can still be subject to FICA. For CPP prep, go deeper into method selection, the $1 million threshold, source authority, state differences, payroll system setup, and explaining withholding results to employees.
Supplemental wage withholding FAQ
Are bonuses taxed at 22%?
Not exactly. The 22% rate is an optional federal withholding rate for certain supplemental wages under the $1 million threshold. The employee’s final income tax is determined on the tax return.
Do supplemental wages still have Social Security and Medicare tax?
Generally, yes, if the payment is wages subject to FICA. Social Security tax applies up to the annual wage base, and regular Medicare tax has no wage base limit.
What happens when supplemental wages exceed $1 million?
For 2026, supplemental wages over $1 million in a calendar year are subject to mandatory federal withholding at 37% on the excess amount.
Should employees use the 22% rate to predict whether they will owe tax?
No. Withholding is only a prepayment. Employees should consider their full income, filing status, deductions, credits, and other withholding when estimating final tax.
Practice supplemental wage questions.
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