What Are Supplemental Wages and How Are They Taxed?

Supplemental wages are payments an employer makes to an employee that fall outside regular salary or hourly pay, and how they are taxed depends on which withholding method the employer uses. For federal income tax in 2026, employers can withhold a flat 22% on supplemental payments under $1 million, or they can use the aggregate method, which combines the supplemental payment with regular wages and applies the employee’s W-4. Above $1 million in cumulative supplemental wages for the year, a mandatory 37% rate takes over. Social Security and Medicare taxes apply the same way they do to regular pay. And the withholding rate is not the final tax: your actual tax on a bonus or commission gets settled when you file.

What Counts as Supplemental Wages

The IRS defines supplemental wages as wage payments that are not regular wages. The defining feature is irregularity, in timing or amount, compared to your normal paycheck.¹ The common categories:

Bonuses and commissions, including annual performance bonuses, signing bonuses, and sales commissions.
Overtime pay, when paid separately from regular wages. An employer can also choose to treat overtime as regular wages.
Severance pay and payouts of accumulated sick leave or vacation.
Back pay and retroactive pay increases.
Cash and non-cash awards for performance, safety, or similar recognition.
Reported tips, which an employer may treat as either supplemental or regular wages.
Taxable fringe benefits, non-accountable expense reimbursements, and payments for nondeductible moving expenses.

The classification matters because it determines the withholding method. If an employer folds a bonus into a regular paycheck without separating the two amounts on the records, the whole payment is treated as regular wages and the standard withholding tables apply to the combined figure. That usually pulls more tax than needed.

The Two Federal Withholding Methods

When an employer separately identifies supplemental wages from regular wages, and has withheld income tax from the employee’s regular pay in the current or immediately preceding calendar year, the employer can pick between two methods.¹

The Flat 22% Rate

The simpler option is to withhold a flat 22% of the supplemental payment for federal income tax, ignoring the employee’s filing status or W-4.¹ No other percentage is allowed. This is what most employers use for standalone bonus checks: the math is a single multiplication, with no tables to reference.

The Aggregate Method

Under the aggregate method, the employer adds the supplemental payment to the regular wages for the pay period, calculates withholding on the combined total using the employee’s W-4 and the standard IRS tables, then subtracts the tax already withheld (or scheduled to be withheld) on the regular wages alone. The remainder is what comes out of the supplemental portion.¹

This method is more work but can land closer to an employee’s real tax rate, especially in lower brackets. It is also required when supplemental wages are combined with regular wages in a single payment and the employer does not identify the amount of each.

When the Flat Rate Is Not Available

The 22% flat rate is off the table if the employer did not withhold any income tax from the employee’s regular wages in the current or immediately preceding year.¹ That situation can come up when an employee’s W-4 zeroes out regular withholding, and in certain sick pay arrangements. The aggregate method must be used instead.

The 37% Rate Above $1 Million

Once an employee’s cumulative supplemental wages from a single employer (or from employers under common control) top $1 million in a calendar year, every dollar over that threshold must be withheld at 37%.¹ That matches the top federal income tax bracket for 2026.² The W-4 does not affect it.

An example: an employee who has already received $900,000 in supplemental wages during the year gets a $200,000 bonus. The first $100,000 of that bonus can still be withheld at 22%. The remaining $100,000, which sits above the $1 million line, must be withheld at 37%. The 22% and 37% rates were made permanent by P.L. 119-21.

Social Security, Medicare, and Additional Medicare Tax

Federal income tax is only one slice. Supplemental wages carry the same Social Security and Medicare tax treatment as regular wages.³

Social Security tax is 6.2% withheld from the employee, up to the 2026 wage base of $184,500. Above that ceiling, no more Social Security tax comes out for the year.⁴
Medicare tax is 1.45%, with no wage cap.
Additional Medicare Tax of 0.9% applies to wages over $200,000 in a calendar year. Employers must start withholding it once wages cross that line, regardless of filing status or a spouse’s income.⁵

A large bonus can push you past the Social Security wage base or the $200,000 Additional Medicare threshold mid-year. Later paychecks will look different once those lines are crossed.

Why the 22% Withholding Is Not Your Actual Tax

This is where most confusion starts. The 22% is a withholding shortcut, not a tax rate. A bonus is ultimately taxed at whatever marginal rate your total income lands in, which could be higher or lower than 22%. So the same bonus can produce a balance due for one employee and a refund for another.

The 2026 federal income tax brackets for single filers:²

10% on income up to $12,400
12% on $12,401 to $50,400
22% on $50,401 to $105,700
24% on $105,701 to $201,775
32% on $201,776 to $256,225
35% on $256,226 to $640,600
37% over $640,600

Say your salary already puts you in the 32% bracket and you receive a $15,000 bonus. Your employer withholds $3,300 under the flat rate, but the actual federal tax on that bonus is closer to $4,800. You will owe the roughly $1,500 gap at filing time unless other withholding or credits cover it. Someone in the 12% bracket has the opposite experience: 22% withholding overshoots their real rate by ten points, and the excess comes back as a refund.

If your marginal rate sits well above 22%, you have two ways to avoid a surprise in April. You can update your W-4 to add withholding on regular paychecks for the rest of the year, or you can make an estimated tax payment. Either one is better than an underpayment penalty.

Non-Cash Payments and Gross-Up

Some supplemental wages arrive as a benefit rather than a check: the taxable value of a company car, a non-cash prize, an employer-paid gym membership. There is no paycheck to withhold from, so the taxes come out of the employee’s regular wages or from other funds the employee makes available.

Some employers “gross up” the payment instead, giving the employee enough extra cash to cover the tax so the intended value lands in their pocket. The IRS lays out a specific formula for this. When the stated pay is $170,385.75 or less in 2026, the employer divides the stated pay by 0.9235, which accounts for the 7.65% employee share of Social Security and Medicare, to arrive at the wage amount to report.³ A different calculation applies above that threshold because the Social Security wage base changes the math.

How Supplemental Wages Show Up on Your W-2

Supplemental wages do not appear on their own line. They are folded into your regular wages in Box 1 of your W-2, and the combined federal income tax withheld appears in Box 2. Social Security and Medicare wages are reported in their own boxes, subject to the annual limits.⁶

From the employee’s side, that means Form 1040 uses those combined totals. You do not calculate a separate figure for the bonus portion. The regular-versus-supplemental distinction shapes how tax gets withheld during the year and then disappears by the time you file.

Deferring a Bonus Into Your 401(k)

Many 401(k) plans let you defer part of a bonus or commission into the plan, which reduces the taxable amount of that payment. Whether yours does depends on the plan document: some plans apply your elected deferral rate to all compensation, while others exclude certain pay types. If you are not sure, ask the plan administrator.

The 2026 elective deferral limit is $24,500.⁷ If regular payroll deferrals have already brought you close to the cap, a late-year bonus can push you over unless your payroll system stops contributions at the limit. Some employees lower their deferral rate earlier in the year specifically so a year-end bonus can absorb more of the deferral space, cutting both withholding and taxable income.

State and Local Rules Are Their Own Question

State treatment of supplemental wages varies widely. Many states allow a flat rate on supplemental payments, but the rates run from roughly 1.5% to over 11%. Other states require the aggregate method. A handful have no income tax at all. Cities and counties sometimes add their own withholding rules on top. If your bonus withholding looks different from a coworker’s in another state, that patchwork is almost always why.

1
Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide – Section: 7. Supplemental Wages
2
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026, Including Amendments From the One, Big, Beautiful Bill
3
Internal Revenue Service. Publication 15-A (2026), Employer’s Supplemental Tax Guide
4
Social Security Administration. 2026 Cost-of-Living Adjustment (COLA) Fact Sheet
5
Internal Revenue Service. Questions and Answers for the Additional Medicare Tax
6
eCFR. 26 CFR 31.3402(g)-1 Supplemental Wage Payments
7
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500