Supplemental Wage Withholding: Flat Rate, Aggregate, and the $1M Rule

Federal supplemental wage withholding gives employers two methods: a 22% flat rate applied directly to the payment, or an aggregate method that combines the supplemental payment with regular wages and runs the whole amount through the employee’s W-4 and the standard withholding tables. The flat rate is only available if you’ve withheld income tax from the employee’s regular wages at some point during the current or preceding calendar year. Any supplemental wages above $1 million in a calendar year must be withheld at a mandatory 37%, regardless of which method you’d otherwise use.¹

What Counts as a Supplemental Wage

Supplemental wages are wages that aren’t regular salary or hourly pay. The federal regulations list bonuses, commissions, overtime pay, severance, accumulated sick leave payouts, back pay, prizes, retroactive pay increases, taxable fringe benefits, nonqualified deferred compensation, and expense reimbursements paid under a nonaccountable plan.²

Equity compensation lands in the same bucket. Income recognized when restricted stock vests or when an employee exercises a nonstatutory stock option is treated as supplemental wages and follows the same withholding rules as a cash bonus.² Employers may elect to treat overtime pay and reported tips as regular wages instead, but everything else on the list gets supplemental treatment.¹

One point that trips people up: a payment doesn’t have to be a separate check to count as supplemental. If you pay a bonus alongside a regular paycheck without breaking out the amounts, the whole payment is treated as a single regular wage payment for withholding purposes. The supplemental methods only apply when you identify the supplemental portion separately.¹

The 22% Flat Rate Method

Most employers reach for the flat rate because the math is immediate. Multiply the supplemental payment by 22%, and that’s your federal income tax withholding. No W-4 lookup, no wage bracket tables.¹

A $5,000 bonus produces $1,100 in federal income tax withholding. A $20,000 commission check produces $4,400. The rate is locked at exactly 22%; no other percentage is allowed under this method.

The prerequisite: you must have withheld income tax from the employee’s regular wages at some point during the current calendar year or the immediately preceding calendar year. If that condition isn’t met, the flat rate is off the table and the aggregate method is mandatory.²

Because the 22% rate ignores the employee’s Form W-4, it also ignores filing status, dependents, and any additional withholding requested in Step 4(c). An employee who asked for extra withholding each pay period won’t see that extra amount applied to a supplemental payment processed under the flat rate.³ High-bracket employees are often underwithheld as a result: a $50,000 bonus to someone in the 32% bracket produces $11,000 of federal income tax withholding, leaving a gap for April.

The Aggregate Method

The aggregate method treats the supplemental payment as part of the employee’s regular pay for that period, so withholding tracks the employee’s actual marginal rate more closely.

The calculation runs in four steps:

Add the supplemental payment to the employee’s regular wages for the current pay period (or the most recent pay period if the two aren’t paid together).
Calculate withholding on the combined total using the employee’s W-4 and the standard IRS wage bracket or percentage tables, as if the full amount were a single regular paycheck.
Calculate the withholding that would apply to the regular wages alone, using the same W-4 and tables.
Subtract the third figure from the second. The difference is what you withhold from the supplemental payment.

An employee earning $3,000 per biweekly pay period who receives a $2,000 bonus illustrates the mechanics. Combined, the pay period total is $5,000. If the tables show $336 in withholding on $5,000 and $186 on $3,000 alone, you withhold $150 from the bonus. That’s a 7.5% effective rate on the bonus. For a high earner whose combined total pushes into a higher bracket for the pay period, the same arithmetic can produce withholding above 22%.

The aggregate method becomes mandatory when you haven’t withheld income tax from the employee’s regular wages at any point during the current or preceding calendar year. That typically means new hires who haven’t received a regular paycheck yet, or employees whose W-4 previously produced zero withholding.²

The $1 Million Mandatory 37% Rate

Once an employee’s total supplemental wages from a single employer exceed $1 million during the calendar year, a mandatory 37% rate applies to every dollar above that line. The rate corresponds to the highest individual income tax bracket for 2026.¹⁴

The 37% rate overrides what the employee put on their W-4, any exempt claim, and any method you were using before. Once cumulative supplemental wages cross $1 million, the mandatory rate takes over for the excess.²

For employers with related companies, the threshold applies across all businesses under common control. If an employee receives $600,000 in bonuses from one subsidiary and $500,000 from another, the combined $1.1 million triggers 37% on the last $100,000.¹ Year-to-date tracking matters: once the threshold is crossed, every subsequent supplemental payment for the rest of the calendar year gets 37% treatment.

FICA Still Applies in Full

The 22% and 37% rates cover federal income tax only. Supplemental wages are subject to the same Social Security and Medicare taxes as regular wages, at the standard rates on every dollar.

Social Security tax is 6.2% on earnings up to the 2026 wage base of $184,500. Once an employee’s combined regular and supplemental wages exceed that amount for the year, no more Social Security tax is withheld.⁵ Medicare tax at 1.45% applies to all wages with no cap.

An additional 0.9% Medicare tax applies once an employee’s total wages exceed $200,000 in a calendar year. You begin withholding the additional tax in the pay period where wages cross $200,000 and continue for the rest of the year. A large supplemental payment can push an employee past that threshold mid-year.⁶ The additional Medicare tax is entirely the employee’s responsibility; there’s no employer match on the 0.9%.

State Supplemental Withholding

Federal rules are only part of the picture. Most states with an income tax also impose withholding on supplemental wages, and many publish their own flat rates. These state flat rates range from roughly 1.5% to nearly 12%. Some states require an aggregate-style calculation under certain conditions, mirroring the federal structure. A handful of states have no income tax and therefore no supplemental withholding.

The mechanics generally parallel the federal system: if the supplemental payment is identified separately and you’ve been withholding state tax from regular wages, you can apply the state’s flat supplemental rate. Otherwise, the state typically requires an aggregate-style calculation using state withholding tables. Verify each state’s current rate and method at the start of each calendar year if you process payroll across multiple states.

Watch for the Next-Day Deposit Trigger

A big bonus run can create a deposit deadline that catches employers off guard. If your accumulated federal employment tax liability reaches $100,000 or more on any single day during a deposit period, you must deposit those taxes by the close of the next business day, whether you’re normally a monthly or semiweekly depositor.⁷

A company that pays $500,000 in year-end bonuses on a single day can easily generate $100,000 or more in combined income tax withholding and FICA liability. The normal semiweekly or monthly schedule doesn’t apply in that scenario. Missing the next-day deadline triggers a failure-to-deposit penalty running from 2% to 15% of the underpaid amount depending on how late the deposit arrives.⁸

Reporting and Recordkeeping

Supplemental wages combine with regular wages on Form W-2 at year end. The total wages go in Box 1 and the total federal income tax withheld from both regular and supplemental wages goes in Box 2. There’s no separate line that breaks out supplemental wages or identifies the withholding method you used.¹

Internally, keep records showing which method you applied to each supplemental payment: flat 22%, aggregate, or mandatory 37%. The IRS requires employers to retain all employment tax records for at least four years and to make them available on request.¹ Those records also help when employees ask why their bonus withholding looks different from their regular paycheck, which happens every December.

1
Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide
2
eCFR. 26 CFR 31.3402(g)-1 – Supplemental Wage Payments
3
Internal Revenue Service. Publication 15-T (2026), Federal Income Tax Withholding Methods
4
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
5
Social Security. 2026 Cost-of-Living Adjustment (COLA) Fact Sheet
6
Internal Revenue Service. Publication 926, Household Employer’s Tax Guide
7
Internal Revenue Service. Notice 931 – Deposit Requirements for Employment Taxes
8
Internal Revenue Service. Employment Tax Due Dates