What are supplemental wages

The Ins and Outs of Supplemental Wages

What Are They Exactly?

There are a few misconceptions about the difference between supplemental wages and regular wages, and we're here to guide you through the confusion to make it clear for both you and your employees. Knowing the differences will make handling taxes and dealing with the IRS less of a hassle when each payroll period approaches.

So what are supplemental wages? According to page 18 of the 2018 edition of IRS Publication 15, (Circular E), Employer's Tax Guide, “Supplemental wages are wage payments to an employee that are not regular wages.”

The IRS considers many types of additional pay as supplemental wages, including, but not limited to the following:

Accumulated sick leave
Overtime pay
Severance pay
Back pay
Commissions
Awards
Prizes
Bonuses
Nondeductible moving expenses
Retroactive wage increase
The value of taxable fringe benefits
Expense allowances paid under a nonaccountable plan

Know the Difference between Regular Wages and Supplemental Wages

Why is it important to know the difference between regular wages and supplemental wages? Because the payment of regular wages is subject to state wage payment laws, and taxes are withheld based upon the employee's Form W-4. On the other hand, supplemental wages are not subject to state wage payment laws, and they are often taxed differently.

State wage payment laws regulate how often an employee must be paid (weekly, biweekly, semimonthly, monthly, etc.), and they regulate how soon an employee must be paid wages that he has earned. For instance, one state may stipulate that employees paid on an hourly basis may not be paid less frequently than biweekly, and an employee must be paid his regular wages within 7 days of the end of the period in which the wages were earned.

The distinction is particularly important when it comes to overtime pay. As the article What Is Overtime Pay? emphasized, overtime pay is the 50% premium that is paid for overtime hours. The hourly wages for all hours worked must be paid according to state wage laws, but the overtime pay may be paid at a later date.

Why might an employer not pay an employee's overtime pay at the same time as his regular wages? Certain types of additional compensation, such as nondiscretionary bonuses and commissions, must be included when calculating the employee's regular rate of pay and the overtime pay premium. For instance, if an employee receives a monthly production bonus, his employer may not be able to calculate the overtime pay for each workweek during the month until after the bonus has been calculated, so both the overtime pay and production bonus are paid as supplemental wages at the end of the month.

When May Supplemental Wages Be Paid?

Since the payment of supplemental wages is not governed by state wage laws, employers actually have three options for making these payments:

Include the supplemental wages with the payment of the employee's regular wages. This is a common practice for the payment of most overtime pay, expense allowances, and the value of taxable fringe benefits.
Pay the employee at the same time as his regular wages, either identifying the supplemental wages separately on the same paycheck as his regular wages, or by issuing a separate check for the supplemental wages.
Pay the supplemental wages in an off-cycle paycheck.

This article discussed the difference between regular wages and supplemental wages. The following article will discuss how income taxes should be withheld from supplemental wages.