Supplemental Wage Withholding: Percentage vs. Aggregate Method

Federal law gives employers two ways to withhold income tax from a bonus, commission, or other supplemental payment: a flat percentage method that applies 22% to the supplemental amount, and an aggregate method that combines the payment with regular wages and uses the employee’s normal W-4 brackets. The percentage method is simpler and produces predictable withholding. The aggregate method tracks the employee’s actual bracket more closely but often withholds more on a large one-time payment. Which one applies to a given check depends on how the payment is recorded on payroll, whether the employer has already withheld tax from the employee’s regular wages, and whether year-to-date supplemental pay has crossed $1 million.

What Counts as a Supplemental Wage

The rules only matter if the payment qualifies as supplemental in the first place. The IRS treats supplemental wages as any compensation paid on top of regular salary or hourly pay, including bonuses, commissions, overtime, severance, back pay, accumulated sick leave payouts, awards, prizes, retroactive raises, reported tips, nondeductible moving expense payments, taxable fringe benefits, and expense allowances paid under a nonaccountable plan.¹

Regular wages are the predictable amount an employee expects at a fixed rate each pay period. Supplemental wages arrive at irregular intervals, reward specific performance, or compensate for something outside the normal arrangement. Size does not decide the category. A $500 holiday check and a $50,000 sales commission are both supplemental. Employers may also treat overtime and tips as regular rather than supplemental if they prefer, which changes how withholding is calculated on those items.

The Percentage Method: Flat 22%

Under the percentage method, the employer isolates the supplemental payment, multiplies it by 0.22, and withholds the result. Filing status, W-4 entries, and the size of the employee’s regular paycheck do not enter the calculation.² This is what most people see on a bonus check.

The flat rate is only available when three conditions are all met. Year-to-date supplemental wages must be at or below $1 million. The supplemental pay must be either paid separately from regular wages or clearly identified as a separate amount in the employer’s payroll records. And the employer must have already withheld federal income tax from the employee’s regular wages at some point during the current or preceding calendar year.³ Miss any one of the three and the percentage method is off the table.

That third condition catches some new hires. A signing bonus paid before the first regular paycheck has been processed does not qualify, because no regular-wage withholding has occurred yet. The same is true for an employee who was exempt from withholding on regular wages throughout the prior year. In both cases the aggregate method must be used.

The Aggregate Method: Combine, Calculate, Subtract

The aggregate method treats the supplemental payment as if it were part of a regular paycheck, then backs out the tax already accounted for by normal withholding. The mechanics run in four steps.¹

Add the supplemental wages to the employee’s most recent regular wages for the current pay period.
Using the employee’s W-4 and the withholding tables in Publication 15-T, calculate the income tax as if the combined amount were a single regular paycheck.²
Subtract the tax already withheld (or being withheld) from the regular wages alone.
Withhold the remaining amount from the supplemental payment.

If no regular wages are paid at the same time, the employer adds the supplemental amount to either the current period’s regular wages or the preceding period’s regular wages and runs the same subtraction. If more than one supplemental payment hits during the same pay period, each is aggregated with all previous supplemental and regular wages for that period, and any tax already withheld from earlier payments is subtracted out.

Why the Aggregate Method Can Withhold More

Because the aggregate method uses graduated brackets, a large bonus can temporarily push the combined amount into a higher bracket for the pay period. Consider an employee earning $3,000 biweekly who receives a $10,000 bonus. Withholding is calculated as if the paycheck were $13,000. The tables annualize that figure, which puts the pay period into a bracket far above the employee’s actual salary, so the effective rate on the bonus portion can exceed 22%. The annual tax return reconciles the difference, but the short-term reduction in take-home pay is real.

Which Method Applies to Your Payment

The aggregate method is the default. It is required whenever the percentage method’s conditions are not all satisfied, and it remains available even when the percentage method could be used.³ The employer, not the employee, chooses between them when both are permitted.

Employers typically pick based on administrative ease. A company distributing holiday bonuses to hundreds of people at once will almost always run the flat 22%. An employer processing irregular commissions through the same payroll run as regular wages may find the aggregate method applied automatically by the payroll software. Some employers default to aggregate for everyone because it removes the need to verify the percentage-method conditions on each payment. Others use aggregate deliberately for employees who tend to owe money at filing time, since it usually withholds closer to the actual liability.

Neither method changes what the employee ultimately owes. Both are estimates that get reconciled on the annual return. The percentage method is convenient and predictable but can under-withhold for employees in the 24%, 32%, or higher brackets and over-withhold for those in the 10% or 12% brackets. The aggregate method tailors withholding to each employee’s W-4 and generally lands closer to the true liability, but it can over-withhold on large one-time payments because of the bracket-stacking effect. An employee who wants tighter control can adjust the W-4, but that adjustment only affects the aggregate calculation. The percentage method ignores the W-4 entirely.

The Mandatory 37% Rate Above $1 Million

Once an employee’s cumulative supplemental wages from a single employer exceed $1 million in a calendar year, a mandatory flat 37% rate applies to every dollar above that mark.¹ This rate matches the top individual income tax bracket and overrides both the percentage method and the aggregate method. The W-4 is irrelevant for the excess portion.³

For businesses under common control, supplemental wages paid by all related entities count toward the $1 million threshold for each employee.¹ A company that has paid an executive $900,000 in bonuses through November and then awards $200,000 in December applies its normal method (22% flat or aggregate) to the first $100,000 of the December payment and the mandatory 37% to the remaining $100,000.

What the Method Choice Does Not Affect

The percentage-versus-aggregate question only governs federal income tax withholding. Social Security and Medicare taxes come out of supplemental wages at the same rates as regular wages regardless of which method the employer uses. For 2026, that means 6.2% Social Security on wages up to the $184,500 wage base and 1.45% Medicare with no cap.⁴⁵ An additional 0.9% Medicare tax kicks in once year-to-date wages cross $200,000, and a large bonus can trigger that threshold unexpectedly.⁶

State income tax withholding is a separate layer. Most states that tax income also require withholding on supplemental wages, and many offer their own flat-rate option, but the rates and rules vary and do not necessarily track the federal structure. Employees in states without an income tax have no state supplemental withholding at all. For everyone else, the state amount sits on top of whatever the federal calculation produces, along with Social Security and Medicare.

1
Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide
2
Internal Revenue Service. Publication 15-T (2026), Federal Income Tax Withholding Methods
3
eCFR. 26 CFR 31.3402(g)-1 – Supplemental Wage Payments
4
Internal Revenue Service. Publication 15-A (2026), Employer’s Supplemental Tax Guide
5
Social Security Administration. Contribution and Benefit Base
6
Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates