Guide · 2026 Tax Year

Bonus & Supplemental Wage Withholding

Bonuses, commissions, and overtime premiums are called supplemental wages by the IRS. They follow a different withholding rule than regular paychecks — a rule that is simple on the surface but has one trap that catches most employers eventually. This guide explains the flat-rate method, the 37% cumulative threshold, and how the state side works.

What counts as a supplemental wage

IRS Publication 15, Section 7 defines supplemental wages as anything paid to an employee that is not a scheduled regular wage. That includes bonuses, commissions, overtime pay, severance pay, back pay, retroactive raises, awards, prizes, taxable fringe benefits, accumulated sick pay, and taxable moving expense reimbursements. If you are asking “is this a regular wage or a bonus?”, the default answer is bonus.

Method 1 — the flat 22% rate

The simplest option — and the default most small employers use — is the flat-rate method. Withhold 22% of the supplemental wage for federal income tax. That’s it. No W-4 lookup, no annualization, no bracket math. Two conditions apply: the supplemental payment must be paid separately from (or clearly identified on) the regular paycheck, and the employer must have withheld income tax from regular wages at some point during the current or prior calendar year.

Method 2 — the aggregate method

The alternative is the aggregate method: add the bonus to the regular wages for the most recent pay period and run the full percentage-method calculation on the combined total, then subtract whatever you already withheld on the regular wages to get the bonus withholding. This is how payroll systems that don’t offer a flat-rate toggle handle bonuses. It produces a number that more closely tracks the employee’s actual marginal rate, but it is fiddly to do by hand.

Most small employers use the flat 22% method because it is unambiguous and audit-proof. The employee’s real tax liability is reconciled on their annual return either way.

The $1M trap — and the 37% rate

Here is the trap: once cumulative supplemental wages paid to an employee in the calendar year exceed $1 million, the federal withholding rate on the excess becomes 37%. That threshold is cumulative across all supplemental payments in the year — not per payment. And the 37% is mandatory: unlike the 22% rate, employers cannot opt out of it even if they prefer the aggregate method.

For most small businesses this threshold never comes up, but if you’re paying a senior employee a one-time buyout, vesting an equity grant, or cutting a big commission check, it matters. Track cumulative supplemental wages per employee, not per payment.

FICA and state tax still apply

The flat-rate method only controls federal income tax withholding. Bonuses are still subject to Social Security (6.2%) and Medicare (1.45%, plus 0.9% additional Medicare above the threshold), and the Social Security wage base still applies normally. On the state side, flat-rate states like Pennsylvania (3.07%) or Colorado (4.4%) use the same rate they use for regular wages. Bracket states typically offer an optional flat supplemental rate equal to the top marginal bracket. Withhold Right’s bonus calculator handles this automatically.

Frequently Asked Questions