There are a few misconceptions about the difference between supplemental wages and regular wages. These differences, such as timing and calculation of withholdings, impact payroll taxes for your team. Understanding supplemental wages, and the options you have for paying them to your employees, is an important part of running payroll for your business.
What Are Supplemental Wages?
According to 2018’s IRS Publication 15, (Circular E), Employer's Tax Guide, supplemental wages are simply “wage payments to an employee that are not regular wages.” Most states have similar definitions of supplemental wages.
The IRS considers many types of employee pay as supplemental income, including but not limited to:
- Accumulated sick leave
- Severance pay
- Back pay
- Nondeductible moving expenses
- Retroactive wage increases
- The value of taxable fringe benefits
- Expense allowances paid under a nonaccountable plan
Learn how to hire and manage employees in a new state.
Regular Wages and Supplemental Wages
The main difference to know between regular wages and supplemental wages has to do with taxes. The payment of regular wages is subject to state wage payment laws, and taxes are withheld based upon the employee's Form W-4 and any state tax withholding form that an employee may complete. On the other hand, supplemental wages are taxed differently when they are paid separately from regular wages and identified separately from regular wages.
State wage payment laws regulate how often an employee must be paid (weekly, biweekly, semimonthly, monthly, etc.), and they regulate how soon an employee must be paid wages that they have earned. For instance, a state may require that employees paid on an hourly basis are paid at least on a biweekly basis, and a state may further require that such employee is paid their regular wages within seven days of the end of the period in which the wages were earned. However, most states to not have such timing requirements with respect to the payment of supplemental wages.
When supplemental wages are paid and identified separately from regular wages, the withholding calculation is sometimes different from the withholding calculation for regular wages.
The distinction is particularly important when it comes to overtime pay. Under federal law, when a non-exempt employee works more than 40 hours in a workweek, overtime must be paid at 1.5 times the employee’s regular rate of pay. The hourly wages for all hours worked must be paid according to state wage laws, but the overtime pay may be paid at a later date. Note that state law regarding the timing of overtime wages may vary a bit.
An employer may choose to pay an employee's overtime pay at the same time as their regular wages. Certain types of additional compensation, such as nondiscretionary bonuses and commissions, must be included when calculating the employee's regular rate of pay and the overtime pay premium.
For example, if an employee receives a monthly production bonus, their employer may not be able to calculate the overtime pay for each workweek during the month until after the bonus has been calculated, so both the overtime pay and production bonus are paid as supplemental wages at the end of the month. When supplemental wages are paid and identified separately from regular wages, the withholding calculation is sometimes different from the withholding calculation for regular wages.
When Can Supplemental Wages Be Paid?
Since the timing of supplemental wage payments is not always governed by state wage laws, employers may have different options for making these payments:
- Include the supplemental wages with the payment of the employee's regular wages. This is a common practice for the payment of most overtime pay.
- Pay the employee at the same time as their regular wages, either identifying the supplemental wages separately on the same paycheck as the regular wages, or by issuing a separate check for the supplemental wages.
- Pay the supplemental wages in an off-cycle paycheck.
Justworks customers can schedule supplemental payments for their employees in a couple of ways. Employers can elect to schedule these payments for any day they like, or schedule the supplemental wages to be deposited on the same day as a regular paycheck. In the second case, the employee will see two separate statements — one for the regular wages and one for the supplemental wages.
For more on this subject, check out Part 2 of this series to learn how to determine tax rates on supplemental wages.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.