Supplemental Wage Withholding: Flat Rate, Aggregate, and the $1M Rule

Supplemental wage withholding is the federal income tax an employer takes out of a bonus, commission, severance check, or other pay that isn’t part of an employee’s regular salary or hourly wages. Employers use one of two methods: a flat 22% rate applied straight to the payment, or an aggregate method that combines the supplemental payment with the employee’s regular wages for that pay period and withholds based on the total. A mandatory 37% rate applies to any supplemental wages an employee receives above $1 million from a single employer in a calendar year.¹

What Counts as a Supplemental Wage

The federal regulations define supplemental wages broadly. The list includes bonuses, commissions, overtime pay, severance, accumulated sick leave payouts, back pay, prizes, retroactive pay increases, taxable fringe benefits, nonqualified deferred compensation, and expense reimbursements paid under a nonaccountable plan.²

Equity compensation belongs on the list too. Income recognized when restricted stock vests, or when an employee exercises a nonstatutory stock option, is treated as a supplemental wage and follows the same withholding rules as a cash bonus.² Employers may choose to treat overtime and reported tips as regular wages rather than supplemental wages, but the rest of the categories get supplemental treatment.¹

One point that catches employers out: the payment doesn’t have to be a separate check to be supplemental, but the amounts do have to be separately identified. If a bonus is paid alongside a regular paycheck and the two amounts aren’t broken out, the entire payment is treated as a single regular wage payment for withholding purposes. The supplemental methods only kick in when the supplemental portion is identified on its own.¹

The 22% Flat Rate Method

Most employers reach for the flat rate because the math is instant. Multiply the supplemental payment by 22%, and that’s the federal income tax withholding. No W-4 lookup, no wage bracket tables.¹

A $5,000 bonus generates $1,100 in federal income tax withholding ($5,000 × 0.22). A $20,000 commission check generates $4,400. The rate is fixed at exactly 22%. No other percentage is permitted under this method.

There’s one prerequisite. The employer must have withheld income tax from the employee’s regular wages at some point during the current calendar year or the immediately preceding calendar year. If that condition isn’t satisfied, the flat rate isn’t available and the aggregate method becomes mandatory.²

Because the 22% rate is applied without regard to the employee’s Form W-4, it ignores filing status, dependents, and any additional withholding the employee requested in Step 4(c). An employee who set up extra per-paycheck withholding on their W-4 won’t see that extra amount applied to a supplemental payment processed under the flat rate.³ Employees in the 32% or 35% brackets often end up under-withheld on a large bonus. Someone in the 32% bracket with a $50,000 bonus will have only $11,000 withheld at 22%, leaving a gap to cover in April.

The flat rate doesn’t change what the employee actually owes. It only sets what gets collected upfront. An employee whose effective tax rate sits below 22% will see the excess as a refund. Someone with a higher marginal rate will owe more at filing time. There’s no way to substitute a custom percentage through the W-4 when the employer picks the flat method; the employee’s options are to adjust estimated tax payments or ask the employer to use the aggregate method instead, if the employer is willing.

The Aggregate Method

The aggregate method treats the supplemental payment as if it were part of the employee’s regular pay for that period. The result tracks the employee’s actual marginal tax rate more closely, which matters at both ends of the income scale.

The calculation runs in four steps:

Add the supplemental payment to the employee’s regular wages for the current pay period (or the most recent pay period, if they aren’t paid together).
Calculate withholding on the combined total using the employee’s W-4 and the standard IRS wage bracket or percentage tables, as if the whole amount were a single regular paycheck.
Calculate the withholding that would apply to the regular wages alone, using the same W-4 and tables.
Subtract the second figure from the first. That difference is what gets withheld from the supplemental payment.²

A Worked Example

An employee earns $3,000 per biweekly pay period and receives a $2,000 bonus. The employer combines the two for a $5,000 total and looks up withholding on $5,000 using the employee’s W-4 filing status. Suppose the tables show $336 in withholding on $5,000 and $186 on $3,000 alone. The employer withholds $150 from the bonus ($336 minus $186). That’s a 7.5% effective rate on the bonus, well below the flat 22%.

For a high earner whose combined pay-period total pushes into a higher bracket, the aggregate method can produce withholding above 22%. Actual tax liability doesn’t change either way; only the timing of collection does.

When the Aggregate Method Is Required

The aggregate method becomes mandatory when the employer didn’t withhold income tax from the employee’s regular wages at any point during the current or preceding calendar year. This usually applies to new hires who haven’t received a regular paycheck yet, and to employees whose W-4 previously produced zero withholding. In those situations the flat rate is off the table.²

The $1 Million Rule

Once an employee’s total supplemental wages from a single employer cross $1 million in a calendar year, a mandatory 37% flat rate applies to every dollar above that line. The 37% figure matches the highest individual income tax bracket for 2026, permanently set by the extension of the original Tax Cuts and Jobs Act rates.¹⁴

The 37% rate overrides everything else. It applies regardless of what the employee put on their W-4, whether they claimed exempt status, or which method the employer had been using up to that point.²

For employers with related companies, the threshold applies across all businesses under common control. An employee who receives $600,000 in bonuses from one subsidiary and $500,000 from another has $1.1 million in combined supplemental wages, triggering the 37% rate on the last $100,000.¹ Year-to-date tracking matters. Once the threshold is crossed, every later supplemental payment for the rest of the calendar year gets 37% withholding.

Social Security and Medicare Still Apply

Supplemental wages carry the same FICA taxes as regular wages. There’s no separate flat FICA rate for bonuses or commissions.

Social Security tax is 6.2% on earnings up to the 2026 wage base of $184,500. Once combined regular and supplemental wages exceed that amount for the year, no more Social Security tax is withheld from either type of payment.⁵ Medicare tax runs at 1.45% on all wages with no cap.

An additional 0.9% Medicare tax applies once an employee’s total wages exceed $200,000 in a calendar year. The employer begins withholding this additional tax in the pay period where wages cross $200,000 and continues for the rest of the year. A large supplemental payment can push an employee past the threshold mid-year, triggering the additional withholding on wages that follow.⁶ The additional Medicare tax is entirely the employee’s obligation. There’s no employer match on the 0.9%.

State Rules Are Separate

Federal withholding isn’t the whole picture. Most states with an income tax also impose withholding on supplemental wages, and many publish their own flat rates. Those state flat rates range roughly from 1.5% to nearly 12%. Some states require an aggregate calculation under conditions that mirror the federal rules. A handful of states have no income tax at all, so no state supplemental withholding applies.

The mechanics generally track the federal system. If the supplemental payment is separately identified and the employer has been withholding state tax from regular wages, the state’s flat supplemental rate is usually available. Otherwise, an aggregate-style calculation with state withholding tables is typically required. Because rates and rules shift, employers running payroll across multiple states should confirm each state’s current supplemental rate and method requirements at the start of each calendar year.

What Shows Up on the W-2

Supplemental wages get combined with regular wages on the Form W-2 at year end. The total goes in Box 1 (Wages, tips, other compensation), and the total federal income tax withheld from both regular and supplemental wages goes in Box 2. Nothing on the W-2 breaks out supplemental wages or identifies which withholding method was used.¹ Employees who want to reconcile bonus withholding against their expected tax rate need to work from pay stubs, not the W-2.

1
Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide
2
eCFR. 26 CFR 31.3402(g)-1 – Supplemental Wage Payments
3
Internal Revenue Service. Publication 15-T (2026), Federal Income Tax Withholding Methods
4
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
5
Social Security. 2026 Cost-of-Living Adjustment (COLA) Fact Sheet
6
Internal Revenue Service. Publication 926, Household Employer’s Tax Guide