Navigating payroll tax rules in the US is complex enough without throwing bonuses, commissions, and severance pay into the mix. But when you do offer these extra payments — collectively known as supplemental wages — there are multiple rules on how they should be taxed.
When you’re running payroll, it's essential to get this right. In this article, we’ll break down what you need to know about withholding tax on supplemental wages at the local, state, and federal levels, and show you how to simplify the process.
What are supplemental wages?
Supplemental wages (or supplemental pay ) are any payments made in addition to an employee’s regular salary or hourly wages. They can include:
Bonuses (including annual, performance-based, and spot bonuses)
Commissions
Overtime (in certain contexts)
Severance pay
Retroactive pay increases
Back pay
Accumulated sick leave payouts
Awards or prizes paid in cash
These payments often feel like “extra” compensation to employees, but they’re still taxable — and subject to their own withholding rules.
How are supplemental wages taxed at the federal level?
The Internal Revenue Service (IRS) gives employers two methods for withholding federal income tax on supplemental wages, depending on how the payment is made. These are:
1. The flat rate method
If you pay supplemental wages separately from regular wages — or clearly identify them on a pay stub — you can withhold taxes at a flat rate of 22%.
For example, if you give one of your employees a $5,000 bonus as a separate check, you’d need to withhold $1,100 (22%).
Note that this applies to bonuses, commissions, or any other supplemental payments up to $1 million per year per employee. For supplemental wages over $1 million in a calendar year, the excess must be withheld at 37%.
2. The aggregate method
If you combine supplemental wages with regular wages in a single payment and don’t separate them out, then you have to use the aggregate method.
Here’s how it works:
Add the supplemental wages to the employee’s regular wages for that pay period.
Calculate withholding as if the entire amount is a single payment.
Subtract what was already withheld from the regular portion.
For example, say that an employee’s regular base pay is $3,000 every two weeks, and you give them an additional bonus of $2,000 (not separately identified). Their total wages for that pay period would be $5,000 (step 1).
Then, you’d need to calculate the withholding on this $5,000 using the IRS tax tables. For a single filer with no adjustments, this would be around $610 (step 2).
Next, you’d need to calculate the withholding on the regular wages alone, again using the IRS tax tables. For $3,000, this would be around $310 (step 3).
Finally, you’d subtract this $310 from the initial $610, giving you $300 (step 4). This essentially means that bonus triggered $300 in additional withholding, even though the bonus itself was $2,000.
Which approach is better?
The flat rate method is the most straightforward (especially if you're using payroll software ), and it's often preferred for this reason.
Conversely, the aggregate method is more complex and may even result in higher withholding, depending on the employee’s tax bracket.
What about FICA taxes?
Regardless of which approach you choose, it’s important to note that you must also still withhold your employee’s portion of Social Security and Medicare from any supplemental wages (just like with regular wages). There’s no exemption just because it’s a bonus or commission.
How are supplemental wages taxed at the state level?
If you have employees in a state that has a state income tax, it’s likely that you’ll also need to withhold at the state level, too.
The approach you’ll need to take depends on the state. Some states follow the federal flat rate method, while others require you to use the same method as regular wages. Some are more flexible, depending on the scenario.
Here’s a breakdown:
State
Flat rate
Alabama
5%
Arizona
Use standard withholding tables
Arkansas
3.9%
California
6.6%; 10.23% on bonuses and stock options
Colorado
Use standard withholding tables
Connecticut
6.99%
Delaware
5.55%
Georgia
Use standard withholding tables
Hawaii
Use standard withholding tables
Idaho
5.80%
Illinois
4.95%
Indiana
3.23%
Iowa
5.7%
Kansas
5%
Kentucky
4.5%
Louisiana
5%
Maine
5%
Maryland
Use standard withholding tables
Massachusetts
5%
Michigan
4.25%
Minnesota
6.25%
Mississippi
5%
Missouri
4.7%
Montana
5%
Nebraska
5%
New Jersey
Use standard withholding tables
New Mexico
5.9%
New York
6.85%
North Carolina
4.35%
North Dakota
1.5%
Ohio
3.5%
Oklahoma
4.75%
Oregon
8%
Pennsylvania
3.07%
Rhode Island
5.99%
South Carolina
7.0%
Utah
4.85%
Vermont
Withhold at 6% or 30% of federal withholding
Virginia
5.75%
West Virginia
6.5%
Wisconsin
Varies by income bracket – no single rate
What about local taxes?
It’s also important to be aware of local taxes on supplemental wages, with some cities, counties, and districts requiring you to withhold at an additional third level. This can have a significant impact on your employees’ take-home pay, especially in high-tax areas
For example, if you have an employee in New York City and you pay them a $5,000 bonus, you would need to withhold tax on that bonus as follows:
Federal income tax: 22% (flat rate) = $1,100
Social Security: 6.2% = $310
Medicare: 1.45% = $72.50
State income tax (New York): 6.35% (approx) = $317.50
Local tax (New York City): 3.9% (approx) = $195
On that $5,000 bonus, the total withholding at all levels would be around $1,995 — around 40%!
What if the state doesn’t tax income?
Some states — like Texas, Florida, and Washington — do not tax wages at the state level (regular or supplemental). If your employee(s) are in one of these states, you just need to withhold at the federal level.
To get a full picture of your withholding responsibilities by state, check out our free US State Explorer tool.
What do you need to do as an employer?
Once you have calculated what exactly you need to withhold at all the relevant levels for each employee, you need to reflect this in their paychecks, and record the withheld amounts.
You then need to deposit the payments and report as follows:
For federal taxes:
Use the Electronic Federal Tax Payment System (EFTPS). The deposit schedule depends on your IRS deposit frequency (semi-weekly or monthly).
You will also need to file Form 941 each quarter, and Forms W-2 and W-3 annually.
For state tax deposits:
Use the state’s online tax portal (e.g., California EDD or New York NYS Online Services). Due dates and deposit frequencies vary by state.
You will also need to file quarterly wage reports (e.g., NYS-45 in New York or DE-8 in Delaware), plus annual state W-2s (or their equivalents).
For local tax deposits:
Use the state’s payroll portal (some states collect local taxes centrally), or pay directly to the local tax authority’s portal (if one exists).
Some cities (such as Philadelphia) require their own W-2 submission.
How can Remote help?
As you can see, calculating, withholding, depositing, and reporting these payments can be complex, time-consuming, and prone to errors. As a result, it’s highly advisable to use an automated payroll platform such as Remote Payroll .
We handle all of this for you , and ensure you are fully compliant with all local, state, and federal requirements at every step of the process — even when they change.
In the US, we even handle registrations, and remit the payments to the relevant agencies on your behalf — saving you countless hours and administrative tasks.
