If you receive commissions and bonuses in addition to your regular salary or wages, you may find that federal income tax is withheld at a different rate. This is because the IRS considers commissions and bonuses to be supplemental wages. A different withholding rate is applied on these supplemental wages, which could be 25%.
In addition to commissions and bonuses, supplemental wages for federal income tax withholding purposes also include overtime pay, accumulated sick leave, back pay, retroactive pay increases, payment for nondeductible moving expenses, taxable fringe benefits, expense allowances that are paid under a non-accountable plan such as per diems, awards and prizes, and severance pay. Vacation pay, when it is paid in addition to your regular salary or wages for the vacation period, is also considered supplemental wages.
The federal income tax withholding on your regular pay is based on wage bracket tables according to the information you provide to your employer on the W-4 form. According to the IRS, if the employer pays supplemental wages along with your regular salary or wages and does not separately identify them, federal income tax should be withheld according to the wage bracket tables as one single amount.
If the supplemental wages are paid separately or are combined with your regular pay but are separately specified on your salary or wage statement, the employer has two options. If your employer withheld taxes from your regular pay this year or last year, it can withhold taxes from the supplemental wages at a flat 25%.
Or the employer can combine the supplemental wages and the amount of wages from your most recent base pay statement and withhold tax on the total amount according to the wage bracket tables. The amount of withholding from your most recent base pay statement would be subtracted from the withholding on the total amount and the difference would be applied as withholding on the supplemental wages portion.
If you receive subsequent supplemental wage payments, your employer could apply the same method on a cumulative basis, combining the current and previous payments with your most recent base pay amount and calculating the withholding on the total, based on the wage bracket tables. Then it would subtract the amount withheld from your most recent base pay and the amounts previously withheld from supplemental wage payments to determine the amount to be withheld on the current supplemental wage payment.
If an employee receives over $1 million in supplemental wages in a calendar year, special rules apply. The excess over $1 million is subject to withholding at a rate of 35% or the highest income tax rate in effect for that year.
The amount of tax withheld is reported on your W-2 statement at the end of the year and you include it on your annual income tax return. If based on your actual total taxable income for the year, too much tax was withheld based on the supplemental wages withholding requirements, you will receive a refund.
