What are supplemental wages?

Supplemental wages are payments that employers provide to employees in addition to their regular wages. While regular wages are comprised of hourly wages or a monthly salary, supplemental wages can include earnings such as:

  • Severance pay
  • Bonuses
  • Commissions
  • Overtime pay
  • Awards
  • Vacation pay
  • Accumulated sick leave payments
  • Retroactive pay increases

As an enhancement of the basic compensation plan, supplemental wages are subject to specific tax regulations. By law, employers potentially have to withhold tax from supplemental wages differently than from regular wages. Withholding tax from supplemental wages depends on:

  • The total amount of supplemental wages paid annually—if they exceed $1 million, then the employer is required to withhold tax on the highest rate of income tax permitted by federal law
  • If the wages are $1 million or less, then the amount of tax withholding depends on whether the supplemental wages are paid together with regular wages or separately.

Why should HR leaders care about supplemental wages? 

Though supplemental wages don’t make up the bulk of a payment package, they are still an important part of payroll. Understanding supplemental wages can help ensure that employees receive their due compensation on time. Guaranteeing that the company pays employees their entire income—both standard and supplemental wages—is fundamental to building an engaged workforce and maintaining employee retention. Knowing the ins and outs of supplementary wages also enables HR leaders to maintain consistent company compliance regarding federal and state tax laws.

What can HR leaders do to successfully manage supplemental wages?

HR professionals can incorporate these steps to ensure that their company is fairly and lawfully integrating supplemental wages into employee compensation plans:

  • Use the company compensation philosophy as a compass. A compensation philosophy can guide HR and finance professionals in integrating supplemental wages within compensation plans. Successfully managing this integration can reduce costs and contribute to competitive employee salaries. Moreover, a budget-based compensation plan avoids pitfalls, such as misleading employees with enticing supplementary wages the company can’t afford.  
  • Enlist the help of other professionals. Supplemental tax laws are complicated. Collaborating with finance and working with a payroll service can help HR leaders navigate the tricky federal and state laws to forge a smooth path towards compliance. 
  • Explain to employees how the system works. Employees have the right to know how much their total income is and when and how they will receive it. Discussing the payment plan with employees from the beginning of their employment period provides them with crucial job-related information while also reflecting business integrity. 

How can successfully managing supplemental wages improve company culture?

Having a crystal clear policy is the basis for ensuring that employees receive accurate and punctual compensation. Fulfilling expectations illustrates that the company is holding up its side of the business contract to promote a healthy employee-employer relationship. In turn, exemplifying honesty regarding employee compensation can help build a strong foundation for a healthy and growing company community.