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Taxation of Supplemental Wages by State

Author: Alice Gilman

In addition to paying regular wages to employees, employers often make other types of payments to employees during the course of the year that are considered supplemental wages. Supplemental wages include the following payments:

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

Supplemental wages are subject to special federal and state income tax withholding rules. For purposes of state income tax withholding, the withholding method an employer must use usually depends on whether the supplemental wages are paid with, or separately from, an employee's regular wages.

The following chart provides employers with an overview of the current method required to be used in each state to withhold state income taxes from supplemental wage payments made to employees. States that do not have an income tax are marked "N/A".