Supplemental Pay

Supplemental pay is compensation provided in addition to regular wages — including overtime pay, bonuses, commissions, tips, vacation pay paid as a lump sum, and other non-regular forms of compensation. For federal income tax purposes, supplemental wages above $1 million in a calendar year are subject to mandatory 37 percent withholding, while those below $1 million can be taxed using either the flat supplemental rate (22 percent) or the aggregate method that adds the supplemental pay to regular wages and applies normal withholding tables. The practical payroll implication is that large bonus payments should be planned for their tax impact on employees — particularly high earners approaching the $1 million threshold where withholding requirements step up significantly and net bonus proceeds drop materially below the gross amount.