Bonus: Supplemental Wage Tax Treatment

According to IRS guidelines, supplemental wages—such as bonuses—that are processed outside of the regular payroll cycle are subject to additional withholding. IRS Publication 15 outlines the required withholding rates for these types of payments.

You can use the supplemental federal income tax rate when you create a bonus check if these conditions are met:

• You pay the bonus separately from a regular paycheck.
• You withhold at regular withholding rates on the employee's regular salary.

The federal supplemental income tax rate is currently a flat 22% on wages up to $1,000,000. This rate may not be beneficial to your employees if it's higher than their regular rate. If you want to use the supplemental income tax rate for some employee bonuses and not for others, do separate bonus only runs.

If your state also has a supplemental income tax rate, we use the state rate when you choose to use the supplemental rates.

If you'd like to avoid supplemental income tax withholdings, the best thing to do is to include the employee's bonus in a regular pay cycle run (avoiding the supplemental run).

If the employee has accumulated more than $1,000,000 in the current tax year, you must withhold federal income tax at 37%. Check with your accountant regarding allowable tax treatment of a bonus.