How to Withhold on Supplemental Wages Using the Aggregate Method

Author: Alice Gilman

Employees often receive payments in addition to their regular wages - e.g., bonuses. These additional payments are called supplemental wages. Under IRS rules, wages that vary from pay period to pay period (e.g., overtime, commissions, bonuses and reported tips) are always treated as supplemental wages. Supplemental wages also include the following payments:

  • Back pay;
  • Noncash fringe benefits;
  • Sick pay paid by a third party as the employer's agent;
  • Income related to the exercise of nonstatutory stock options;
  • Severance pay;
  • Awards and prizes;
  • Retroactive pay increases;
  • Nondeductible moving expenses; and
  • Expense allowances paid under a nonaccountable plan.

Similar to regular wages, supplemental wages are subject to federal and state income tax withholding and FICA and FUTA taxes. An employer must keep track of its employees' supplemental wages because different income tax withholding rules apply depending on the total amount of supplemental wages an employee receives in a year.

For employees who receive up to $1 million a year in supplemental wages, an employer may choose from several different withholding methods. Under the aggregate method of withholding, an employer may combine supplemental wages with regular wages and withhold on the total as if it were a single payment for the regular pay period. An employer must use the aggregate withholding method if no income taxes are withheld from the employee's pay because the employee claims a high number of withholding allowances, or claims an exemption from income tax withholding, on Form W-4.

Step 1: Determine How Supplemental Wages Will Be Paid

Supplemental wages may either be paid separately from regular wages, or combined in a single payment with an employee's regular wages, and separately stated in the employer's payroll records.

Step 2: Decide When Supplemental Wages Will Be Paid

Supplemental wages may be paid concurrently with an employee's regular pay or separately. To use the aggregate method of withholding, supplemental wages may be paid concurrently with an employee's regular pay for the current pay period, or separately.

Step 3: Identify the Pay Period for Which the Employee Is Being Paid

All employees are paid on the basis of a pay period, and they may have only one pay period. The pay period that applies to an employee's regular pay applies to supplemental pay.

The IRS has established pay periods:

  • Weekly - 52 times a year;
  • Biweekly - 26 times a year;
  • Semimonthly - 24 times a year;
  • Monthly - 12 times a year;
  • Quarterly - 4 times a year;
  • Semiannual - twice a year;
  • Annual - once a year; and
  • Daily or miscellaneous - for employees who are paid without regard to a pay period.

Step 4: Add Supplemental Wages to Regular Wages and Figure Withholding on the Total

The amount of income taxes to be withheld is calculated as if the aggregate of the supplemental and regular wages constitutes a single wage payment for the regular payroll period. Subtract the tax withheld from the regular wages. Withhold the remaining tax from the supplemental wages.

Practical Example

Sharon Warren is paid $3,000 every month. She is single and claims one withholding allowance on her Form W-4. On May 3, she receives $3,000 in regular pay and a $1,000 bonus. A total of $516.33 is withheld from the May 3 check:

  • Value of one withholding allowance for a monthly pay period in 2016: $337.50;
  • Pay subject to withholding: $3,662.50 ($4,000 - $337.50);
  • Income tax withholding from Table 4 - MONTHLY Pay Period for Single person (including head of household): $516.33 ($431.95 + 25% of $337.50 ($3,662.50 - $3,325)).

Step 5: Figure Income Tax Withholding If Supplemental Wages Are Not Paid Concurrently With Regular Wages

If supplemental wages are not paid concurrently with regular wages, aggregate the supplemental wages with the wages paid for the last pay period, or with wages that will be paid for the next pay period. Figure income tax withholding as if the total of the regular wages and the supplemental wages were a single wage payment. Then, subtract taxes that were already withheld from regular wages. The remaining tax is withheld from the supplemental wages.

Practical Example

Instead of receiving her $1,000 bonus with her regular pay, Sharon Warren receives her bonus on May 16; $150 is withheld from the bonus:

  • Value of one withholding allowance for a monthly pay period in 2016: $337.50;
  • Pay subject to withholding: $2,662.50 ($3,000 - $337.50);
  • Income tax withholding from Table 4 - MONTHLY Pay Period for Single person (including head of household): $332.58 ($77.20 + 15% of $1,702.50 ($2,662.50 - $960));
  • Combine the bonus and the regular pay and withhold on the total:
    • Value of one withholding allowance for a monthly pay period in 2016: $337.50;
    • Pay subject to withholding: $3,662.50 ($4,000 - $337.50);
    • Income tax withholding from Table 4 - MONTHLY Pay Period for Single person (including head of household): $516.33 ($431.95 + 25% of $337.50 ($3,662.50 - $3,325));
  • Find withholding on the bonus: $516.33 - $332.58 = $183.75.