Not every employee is the same. Similarly, not every item in an employee’s payroll will be the same– particularly when it comes to the complexities of supplemental payroll.
Supplemental wages are part of an employee’s compensation that doesn’t fit into their normal wages. The types of compensation that can be categorized as supplemental payroll are crucial for small businesses should look at and know. We look at four examples here, but you should also review the IRS’s guidance on supplemental wages as well.
What is supplemental payroll?
Supplemental wages are types of compensation that are paid in addition to the employee’s regular wages. So these wages, when specified by the employer, are paid out as supplemental payroll.
Why does this matter? Basically, it comes down to taxes. If the employee is paid the supplemental wages as regular pay, then it’s taxed at the same rate. But if it’s paid out separately, or in the same check but specified as supplemental wages, it can be taxed at a separate rate or at an aggregate rate. (More on both processes can be found here.) The supplemental tax rate currently is 22%. But it can vary for state taxes. For instance, the supplemental wage tax rate in California is 10.23% for bonuses and stock options or 6.6% for other types of supplemental wages.
How you decide to pay out supplemental wages in your payroll can depend on what’s best for your company, pay periods, employees and state regulations. You should refer to your own state’s rules. (If you’re a Zenefits customer, you can also speak with a certified payroll advisor to walk through these scenarios and get advice.)
But to get a better grasp on how supplemental payroll might work, let’s take a look at a few examples.
Supplemental Payroll Examples:
1. Accumulated Sick Leave
If you allow employees to accrue their unused sick leave, paying this out at the end of their employment could fall into the supplemental wages category. How much you pay out, and whether you have to pay it out, is dependent on your company policy and the laws of the state you do business in or where the employee resides.
2. Severance Pay
Situations that warrant severance pay are layoffs, mutual agreements to go your separate ways, and job elimination. Whether you are required to pay out a severance package is, again, based on the laws of the state where you do business and your company policy. But many employers choose severance pay to cushion a termination or avoid legal issues down the road.
Whatever the case, severance packages can be paid out as a supplemental payroll depending on how you structure it.
3. Payments for Nondeductible Moving Expenses
Sometimes work means a move. In certain cases, the employer might choose to reimburse the employee for making the move. For non-deductible moving expenses, the employer can specify the reimbursed expenses or allowances as supplemental wages.
4. Bonuses and Commissions
For many companies, paying bonuses or commissions is critical to hitting their goals. This is especially prevalent for sales professionals and employees who are paid according to quotas. Bonuses or commissions are typically paid separately from a regular paycheck and separately taxed on a percentage basis.
It’s important to note that if your employee is able to achieve more than $1 million in supplemental wages, then it’s taxed at a higher rate of 37%.
Supplemental payroll is something every small business should be aware of. When and where to use it needs to be carefully considered based on what’s best for the employee and the employer. For more information on tax consequences for employee benefits like these to stay fully informed as an employer, check out IRS Publication 15B.
This article is for informational purposes and is not meant to provide legal, regulatory, accounting, or tax advice. It was originally published May 9, 2018.