What is supplemental pay?

Supplemental pay refers to compensation employers give employees alongside their regular salary. Also referred to as supplemental wages, it includes overtime pay, incentive pay, bonuses, accumulated sick pay, or any other amount aside from the worker’s regular earnings.

Why is supplemental pay important?

Supplemental pay can play a crucial role in inspiring worker productivity and goal attainment. It can also make employees feel valued for their hard work and encourage them to stay loyal to the company.

What qualifies as supplemental pay?

The IRS considers the following supplemental pay:

• Bonuses
• Commission
• Tips
• Overtime pay
• Accumulated sick leave
• Severance pay
• Awards
• Prizes
• Payments for non-deductible moving expenses
• Back pay
• Retroactive pay increases

Who needs to report supplemental wages?

Employers must track and report supplemental wages, as well as follow certain withholding rules. These rules depend on:
The amount of supplemental wages an employee receives during a tax year
If an employee’s supplemental wages are combined with their regular wages or are separate from their regular wages

How are supplemental wages taxes?

Supplemental tax rates depend on the employee’s gross pay. If employees make over $1 million in supplemental wages during a tax year, the money earned following the $1 million mark is subjected to a 37% tax rate. This is mandatory.
If the employee makes less than $1 million in supplemental wages during the tax year, employers must consider the following:

1. If the employee’s supplemental wages are combined with their normal wages and the payment amount of each type (supplemental vs. regular) isn’t stated, companies should withhold federal income tax as normal, using the employee’s Form W-4 to withhold federal taxes.
2. If the employee’s supplemental wages are identified as separate from regular wages, organizations must:
   – Withhold 22% tax fee (only if the company withheld income tax from an employee’s regular wages in the current or the prior tax year), or whatever the correct rate is for the current year.
   – Combine their supplemental wages with their regular wages and withhold federal income tax from this total, using the employee’s Form W-4.

What does not qualify as supplemental pay?

Not all payments are considered supplemental. The following payments are not supplemental pay:

• Paid time off (PTO)
• Stipends for travel, meetings, or other specific purposes
• Vacation pay

What should HR know about supplemental pay?

HR leaders should be aware of how supplemental pay can benefit the business. Key factors to understand include:

• Supplemental wages (via rewards or incentives) can motivate employees to reach goals or KPIs
• Tracking supplemental employee wages is essential for transparency and financial accountability
• Companies must apply all tax withholding rules to be tax compliant
• Compliant supplemental pay processes often involve cooperation between HR and finance teams