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; 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 combines supplemental wages with regular wages and withholds 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 has claimed a high number of withholding allowances on a pre-2020 Form W-4, a high level of adjustments on a 2020 (or later) Form W-4, or claims exemption from income tax withholding on Form W-4.