Employer Withholding on Supplemental Wage Payments: New Task, FAQs Added

Author: Rena Pirsos, XpertHR Legal Editor

Employers often make wage payments to employees that are not regular wages. They include, but are not limited to, bonuses, commissions, overtime pay, payments for accumulated sick leave, severance pay, awards, prizes, back pay, retroactive pay increases and payments for nondeductible moving expenses. Other payments subject to the supplemental wage rules include taxable fringe benefits and expense allowances paid under a nonaccountable plan.

How an employer withholds on supplemental wages depends on whether the supplemental payment is identified as a separate payment from regular wages, the amount of the supplemental wage payment (e.g., more than $1 million) and state law, which may differ from federal law.

To help an employer properly withhold on supplemental wage payments, the Withhold on Supplemental Wages Task and the following eight new FAQs have been added:

• What types of payments to employees are considered supplemental wages?

• What taxes must be withheld from supplemental wages paid to an employee?

• How should an employer withhold federal income and employment taxes on supplemental wages?

• Is state income tax withholding on supplemental wages handled differently than withholding on regular wages?

• Must an employer always treat reported tips and overtime pay received by an employee as supplemental wages for purposes of income and employment tax withholding?

• Should payments to an employee for business travel and other necessary business expenses be treated as supplemental wages for income and employment tax withholding purposes?

• Are pretax salary reduction deferrals included when determining the total amount of an employee's supplemental wages?

• When should vacation pay be taxed as supplemental wages?