What Counts as Supplemental Wages?
The IRS defines supplemental wages broadly. Common categories include: annual and quarterly bonuses, performance-based incentive pay, signing and retention bonuses, lump-sum sales commissions, separately-paid overtime, severance and separation packages, vacation or PTO cash-outs, relocation expense payments, and employee referral bonuses.
IRS supplemental wage withholding rate tiers — 2025
| Annual Supplemental Wages (per employer) | Federal Withholding Rate | Who This Affects |
|---|---|---|
| $0 to $1,000,000 | 22% flat rate (when paid separately) | Vast majority of employees |
| Over $1,000,000 | 37% on the excess above $1M | Executives and very high earners only |
The 22% flat rate covers only federal income tax withholding. Social Security (6.2% up to $176,100 wage base in 2025) and Medicare (1.45% with no cap, plus 0.9% additional above $200,000) still apply to all supplemental wages, adding another 7-8% in most cases.
State Supplemental Withholding Rates
State supplemental wage withholding rates — 2025
| State | Supplemental Withholding Rate | Notes |
|---|---|---|
| California | 10.23% | Plus 1.1% SDI — among the highest in the US |
| New York | 11.7% | NYC residents add 3.876% city tax on top |
| New Jersey | 2.95% or 3.5% | Rate depends on total supplemental wages paid |
| Illinois | 4.95% | Flat rate matches regular income tax |
| Pennsylvania | 3.07% | Flat rate matches regular income tax |
| Texas / Florida | 0% | No state income tax at all |
| Washington State | 0% | No state income tax on wages |
When Employers Must Use the Flat Rate vs Aggregate
The IRS flat rate is available only when the supplemental payment is made separately from a regular paycheck. If the employer issues a single combined payment, they must use the aggregate method. This drives much of the variation employees experience in bonus withholding amounts.
- Separate check for bonus: employer may use flat 22% federal rate
- Combined check (bonus + salary together): employer must use aggregate method
- No prior-year supplemental wages from this employer: aggregate method required for the first payment
- FICA taxes apply regardless of which income tax method is used
- State supplemental rates apply based on state rules, independent of federal method choice
How to Minimize Supplemental Wage Withholding
While you cannot opt out of withholding, you can reduce your taxable supplemental income by maximizing pre-tax payroll deductions like 401(k) contributions and HSA funding before the bonus is processed. Any excess withholding over your actual annual tax liability is returned as a refund when you file.
See Your Supplemental Wage Tax Breakdown
Enter your bonus amount, state, and salary to calculate federal and state withholding on your supplemental wages.