Is a Bonus Always Taxed at the Supplemental Tax Rate?

The supplemental tax rate is a flat federal income tax withholding rate that can be applied to supplemental wages such as bonuses, commissions, overtime, and severance pay. The IRS sets this rate annually to simplify tax withholding for these types of earnings.

What Is the Current Supplemental Tax Rate?

For 2025, the federal supplemental tax rate is:

• 22% for supplemental wages up to $1 million
• 37% for supplemental wages exceeding $1 million

Additionally, state supplemental tax rates may apply, depending on where the employee works.

Do You Have to Use the Supplemental Tax Rate?

Not necessarily. Employers have two options for withholding federal income tax on supplemental wages:

Use the flat supplemental tax rate (22%)

• This is the default and easiest method.
• Applies when supplemental wages are paid separately from regular wages.

  Aggregate method (regular tax withholding)

• Combine supplemental wages with the employee’s most recent paycheck and apply regular W-4 withholding.
• This method can result in higher or lower withholding, depending on the employee’s tax bracket. For example, if the employee's tax rate on regular wages is less than 22%, then the supplemental rate would result in an increased deduction for them.
  
  

Which Method Should You Choose?

✅ Use the 22% rate if you want simplified, consistent withholding.

✅ Use the aggregate method if you prefer to tailor withholding to an employee’s tax situation.

Regardless of the withholding method used during payroll processing, all tax payments will be reconciled on the employee’s personal 1040 tax return at year-end.

State Supplemental Tax Rates

Some states have their own supplemental wage tax rates, while others follow federal guidelines. Before processing payroll, check your state’s rules to ensure compliance.

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