Supplemental wages are compensations paid to employees in addition to their regular wages. These could be commissions, bonuses, any severance payments upon employee termination, or awards.
Even these wages are taxed, and its calculation is called supplemental tax calculations. It solely depends on the amount of wages paid and whether the wages are paid along with regular wages or paid differently.
If the employee receives an annual supplemental wage of more than $1 million, the excess must be withheld at a rate of 37%. Whereas, if employees receive a total annual supplemental wage of less than $1 million, and supplemental wages are included along with regular wages, then taxes can be withheld as if it's a single payment (using Form W-4).
If supplemental and regular wages are paid separately, then the supplemental taxes are either calculated at 25% or using the aggregate method.
In the aggregate method, supplemental wages are added with the regular pay, tax for the combined wage is computed, and tax for regular wages is computed. Finally, the regular wage tax amount is subtracted from the total tax amount to get the supplemental wage rate.
In 123PayStubs, while creating pay stubs, if you've opted for the Advanced Federal and State W-4 add-on, payroll taxes will be calculated based on the W-4 withholdings; else, taxes will be calculated based on the supplemental rate.
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