Supplemental Wages

What it means

Supplemental wages are payments you receive from your employer that are not part of your regular, ongoing salary. This includes things like year-end bonuses, or the value of stock awards like RSUs when they vest (the moment they become yours to keep).

Because these payments do not happen every payday, the government requires your employer to set aside a flat percentage for federal taxes. This is called withholding, which is just money taken out of your paycheck and sent directly to the IRS to cover your taxes.

A simple example

Imagine Sarah earns a $10,000 bonus. Her company uses the standard flat rate of 22% for supplemental wages. They will keep $2,200 of her bonus to send to the government for taxes, and Sarah will receive the remaining $7,800 in her bank account.

Why it matters to you

• This flat 22% rate is just a placeholder and may not match your actual tax bracket.
• If you earn more than $1 million in supplemental wages in one year, your employer must increase your withholding rate to 37%.
• You might owe extra money at tax time if the amount withheld is too low compared to what you actually owe.

Common mistakes to avoid

• Assuming the 22% withheld means you have fully paid your tax obligation for that income.
• Forgetting that large bonuses can push you into a higher tax bracket, meaning you may need to save extra cash for your April tax bill.
• A tax professional can help you calculate if you should pay extra taxes early.

Words used on this page

• RSU: A gift of company stock that becomes yours after you stay at the job for a set time.
• Vesting: The time when you officially own your stock award.
• Withholding: Money your employer takes out of your pay to send to the IRS for taxes.
• Tax Bracket: The range of income that determines the tax rate you pay.