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

Author: Rena Pirsos, XpertHR Legal Editor

Withholding on supplemental wages depends on the amount of supplemental wages paid and how they are paid.

Up to $1 million per year. Generally, if an employee is paid supplemental wages of $1 million a year or less, the employer may combine the supplemental wages with the employee's regular wages and withhold on the total as if it were a single payment for the regular pay period. This is called the aggregate method of withholding.

Or, if the supplemental wages are not paid with regular wages, or the employer combines the supplemental and regular wages in a single payment and separately specifies each amount, and the employer withheld income taxes from the employee's pay during the current or preceding year, the employer may withhold on the supplemental wages using the flat 25% federal withholding rate. This is called the optional flat-rate withholding method.

More than $1 million per year. Generally, if an employee is paid supplemental wages of more than $1 million in a year, the employer is required to withhold a flat amount at the highest income tax rate in effect on the amount of supplemental wages that exceeds $1 million. This applies regardless of whether the employer has withheld incomes taxes from the employee's regular pay, and regardless of the employee's claim of exemption from withholding on his or her Form W-4.