What are supplemental wages?

Supplemental wages are a form of compensation employers offer in addition to base income. While base pay consists of hourly wages or a monthly salary, supplemental pay includes earnings such as:

• Severance pay
• Bonuses
• Commission
• Overtime pay
• Awards
• Vacation pay
• Accumulated sick leave payments
• Reported tips

Take note, though, that employers can legally include reported tips and overtime pay in the regular wages rather than the supplemental wages.

Why should HR leaders care about supplemental wages? 

Though supplemental wages don’t usually make up the bulk of a compensation package, they’re still important. Supplemental pay can serve as a reward for hard work and achievements or an incentive for people to demonstrate more dedication and a better work ethic. 

HR leaders who know the ins and outs of supplemental pay can help ensure professionals know when to expect their pay and what they’re receiving it for. Guaranteeing that the company pays professionals their entire income—both regular and supplemental—is fundamental to building an engaged workforce and maintaining high retention. 

However, properly incorporating supplemental wages into people’s pay doesn’t just improve compensation packages. It also enables HR leaders to ensure consistent company compliance with federal and state tax regulations.

What can HR leaders do to manage supplemental wages successfully?

HR professionals can incorporate these steps to help their company fairly and lawfully implement supplemental pay:  

• Use the company compensation philosophy as a compass. A compensation philosophy can guide HR and finance professionals in integrating supplemental pay into the compensation plan. A budget-based compensation plan can reduce costs, help maintain competitive salaries, and keep companies from offering supplementary wages they can’t actually 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 ensure compliance. 
• Explain how the system works. Everyone in the workforce should know what their compensation package includes and when and how they’ll receive it. Discussing the payment plan with professionals at the beginning of their employment period provides them with crucial job-related information and reflects company integrity.

Who is responsible for reporting supplemental wages? 

The employer is responsible for reporting supplemental pay. Because of this, companies must track how much supplemental pay each person receives annually and whether they distribute supplemental income separately or combined with base pay.

How are supplemental wages taxed? 

Employers can withhold Social Security and Medicare from supplemental wages, just as they do for standard wages. But, when it comes to withholding federal tax, supplemental wages are subject to specific regulations. 

How can you calculate supplemental wages? 

Different payment methods determine how to calculate tax withholdings on supplemental wages.  

The first approach requires employers to pay supplemental wages separately—or combine them into a single payment and specify the amount of each. According to this approach, the employer withholds tax based on an annual flat rate. 

If a professional’s annual supplemental wages are $1 million or less, the employer must withhold 22 percent of the supplemental wages. If a professional’s annual supplemental wages exceed $1 million, the employer must withhold 37 percent. When withholding a flat rate on supplemental wages, employers must withhold taxes separately from the professional’s base pay.

In the second method, the employer combines supplemental pay with base pay and treats them as a single payment. This method is more complicated. It also demands that the employer withhold more money from the payment because it’s higher and includes both supplemental and base pay. The tax amount to withhold also depends on the information each individual includes in the W-4 document.

How can successfully managing supplemental wages improve company culture?

A crystal clear compensation policy is the basis for ensuring that people receive accurate and punctual compensation. A company can promote a healthy employee-employer relationship by fulfilling people’s income expectations. Exemplifying honesty regarding supplemental pay demonstrates integrity and helps increase employee satisfaction and build a healthy and thriving company culture.