Supplemental wages are pay outside an employee’s regular wages, such as bonuses, commissions, overtime paid separately, back pay and severance. They can be withheld at a flat federal rate of 22%, or 37% on amounts over $1 million in a year.
In shortSupplemental wages are payments that are not regular wages for a set pay period. Common examples are bonuses, commissions, retroactive pay increases, payouts of accumulated sick leave, severance, awards and prizes, and overtime when it is paid separately. For federal income tax withholding, IRS guidance for 2026 states that the withholding rate on supplemental wages remains 22%, or 37% when supplemental wages paid to an employee during the calendar year exceed $1 million. Under the optional flat-rate method, the employer withholds 22% from the supplemental payment if it is identified separately from regular wages and income tax was withheld from the employee’s regular wages. Alternatively, the employer can add the supplemental payment to the regular wages for the period and withhold on the total. The 37% rate is mandatory on the portion above $1 million. Social Security and Medicare apply as usual. Withholding is not the final tax: the employee’s actual tax is settled on their return.
The two federal withholding methods
Withholding on a supplemental payment
Method
How it works
Best when
Flat rate
22% of the supplemental payment, shown separately
Bonus paid on its own or itemized
Aggregate
Add to regular wages and withhold on the total
Paid together with regular wages
Over $1 million in the year
37% mandatory on the excess
Very large payments
Whichever method you use, the bonus also counts for Social Security and Medicare. Nondiscretionary bonuses also affect the overtime rate; see regular rate of pay.
The flat 22% is withholding, not the final tax on the bonus.
Worked example: a $1,000 holiday bonus
Same bonus, two withholding methods
A store manager earns $1,600 every two weeks and receives a $1,000 holiday bonus. Payroll pays it on a separate check so it is clearly identified as supplemental wages.
With the flat rate, federal income tax withholding on the bonus is 22% x $1,000 = $220. Social Security (6.2%, $62) and Medicare (1.45%, $14.50) are withheld as on any wages, so the federal amounts withheld from the bonus total $296.50, before any state tax.
If the bonus had been added to her regular paycheck and withheld on the combined $2,600 using the tables, the income tax withheld could be different. Either way, her real tax is worked out on her return, so withholding more or less now does not change what she owes for the year.
Mistakes that are specific to supplemental wages
Not identifying the bonus separately and then using the flat rate anyway.
Forgetting Social Security and Medicare on bonuses and commissions.
Not applying the mandatory 37% rate above $1 million in a calendar year.
Leaving nondiscretionary bonuses out of overtime calculations.
Telling employees the 22% is their final tax on the bonus.
Planning a bonus payment
Decide whether the bonus is discretionary or announced in advance, since announced bonuses affect overtime rates.
Choose the withholding method and whether it will be paid on a separate check or with regular wages.
Calculate overtime adjustments for nondiscretionary bonuses over the period they cover.
Tell employees the gross amount and roughly what will be withheld, so the net amount is not a surprise.
Record the payment as supplemental wages in payroll so it is reported correctly.
Employees often think bonuses are taxed more. Explaining that the flat rate is withholding, not the final tax, and that the real tax is settled on the return, prevents many complaints.
Second example: a retroactive raise
A store gives cashiers a $1 raise effective March 1, but payroll does not apply it until the April 15 check. One cashier worked 240 hours between March 1 and April 15.
She is owed 240 times $1, or $240 in retroactive pay, plus the overtime difference for any overtime hours in that time. Payroll pays the $240 as supplemental wages on the next check, itemized as retroactive pay, so she can see exactly what it covers.
Pay bonuses on their own lineShowing a bonus as its own line or check makes the flat 22% method available and makes the pay stub easier for employees to read.
Questions people ask
What is the federal supplemental tax rate for 2026?
22% for the optional flat-rate method, and 37% on supplemental wages over $1 million paid to an employee in the calendar year.
Are bonuses taxed more than regular pay?
No. Withholding may look higher, but bonuses are taxed as ordinary income and the final tax is settled on the employee’s return.
What counts as supplemental wages?
Bonuses, commissions, separately paid overtime, back pay, retroactive raises, severance, awards and sick leave payouts, among others.
Do Social Security and Medicare apply to bonuses?
Yes. Supplemental wages are subject to Social Security and Medicare like regular wages.
Is retroactive pay a supplemental wage?
Yes. Retroactive pay increases are listed among common supplemental wages, so the same withholding methods apply.
Can an employee ask for a bonus to be paid with regular wages?
The employer chooses the method within IRS rules. Some employers let employees know in advance which method they use so there are no surprises.
Disclaimer: Treat this guide to supplemental wages as general information rather than legal, payroll or tax advice: rules vary by location and change, and every example here is fictional.
