Last updated: October 2026

Supplemental Wages Tax Withholding: The 22% Rule and Its Traps

This page covers federal and state withholding on supplemental wages, such as bonuses and commissions.

The Internal Revenue Service (IRS) defines supplemental wages as wage payments to an employee that are not regular wages. Bonuses, commissions, severance pay, back pay, retroactive pay increases, accumulated sick leave payouts, payments for nondeductible moving expenses, prizes, awards, and overtime pay all qualify. Regular hourly or salary wages do not.

That distinction controls which withholding method you are allowed to use.

What Counts as a Supplemental Payment

Publication 15 treats tips reported by employees as supplemental wages, though employers may treat them as regular wages instead. Taxable fringe benefits and expense allowances paid under a nonaccountable plan also fall under the supplemental wage rules.

Pay a bonus and regular wages on one check without specifying each amount, and Publication 15 has you withhold as if the total were one regular payment. Specify each amount on the stub and the flat rate becomes available for the bonus.

The 22% Flat Rate, and Why It Is Optional

Under $1 million in supplemental payments per employee per calendar year, you have a choice if you withheld income tax from that employee's regular wages this year or last year. You can withhold a flat 22% federal income tax on the bonus or commission check, the 2026 rate in Publication 15. The alternative is the aggregate method, which runs the payment through normal W-4 tables as if it were a larger regular paycheck. If you withheld no income tax from the employee's regular wages in either year, Publication 15 requires the aggregate method.

Once an employee crosses $1 million in supplemental payments during the calendar year, the rule changes. Every dollar above that threshold must be withheld at 37%, the highest rate of income tax for 2026. This is not optional. Withhold it without regard to the employee's Form W-4.

How the Aggregate Method Works

Under the aggregate method, payroll adds the bonus to the employee's most recent regular paycheck and looks up the combined amount in the withholding tables. It then subtracts what was already withheld on the regular check and withholds the difference on the bonus.

A $40,000 executive bonus added to a $4,000 biweekly paycheck produces a table lookup that assumes the employee earns $1.14 million annually.

State Supplemental Rates That Break the Federal Pattern

Federal withholding is only half the story. When California supplemental wages are paid separately from regular wages, the flat rate is 10.23% on bonuses and stock options and 6.6% on everything else. Those rates have applied since November 1, 2009. New York's 2026 supplemental rate is 11.70%.

Georgia withholds on 2026 bonuses at the income tax rate in effect when paid, 5.19% until employers switch to 4.99%, which they may do from May 11, 2026. As of 2026, Minnesota withholds 6.25% on supplemental payments made separately from regular wages.

How Form W-4 Interacts With Bonus Checks

The IRS redesigned Form W-4 for 2020. The old form used allowances. The current form uses dollar adjustments for dependents, other income, deductions, and extra withholding.

Employees who want more withheld can file a new W-4 with an additional amount in Step 4(c).

The flat rate ignores W-4 entries entirely. For a worker with five dependents and a $10,000 bonus, the flat rule has you withhold 22% of $10,000, or $2,200. Their W-4 does not matter on that check.

Social Security, Medicare, and the Other Taxes People Forget

The 22% rule covers federal income tax only. Social Security and Medicare still apply to supplemental payments at the 2026 rates: 6.2% Social Security up to the 2026 wage base of $184,500, and 1.45% Medicare with no cap. In 2026, an additional 0.9% Medicare tax applies to wages above $200,000 in a calendar year, which payroll must withhold starting with the paycheck that crosses the threshold.

Federal unemployment tax applies to the first $7,000 of each employee's wages in 2026. State unemployment depends on the state wage base, which in 2026 is $78,200 in Washington and $7,000 in Florida.

Retirement plan deferrals also apply unless the plan document excludes bonuses from the definition of compensation.

Overtime on Retroactive Bonuses: The Hidden Liability

A nondiscretionary bonus tied to production, attendance, or performance must be included in the regular rate of pay for overtime calculations. If the bonus covers a period during which the employee worked overtime hours, you owe additional overtime pay on the bonus itself.

The math: take the bonus, divide by the total hours worked in the bonus period, multiply by 0.5, and multiply by the overtime hours in that period.

Miss this calculation and you face Fair Labor Standards Act (FLSA) back wage liability plus liquidated damages equal to the unpaid amount. For the mechanics, read our guides on nondiscretionary bonus overtime and the regular rate of pay.

Discretionary bonuses, true holiday gifts with no performance strings attached, are excluded from the regular rate. If your handbook promises a year-end bonus based on company results, it is not discretionary.

Your Action Checklist Before the Next Bonus Run

One: verify the default federal withholding method on your bonus earnings code.

Two: confirm your state supplemental rate is current for 2026.

Three: identify any employee who will cross $1 million in cumulative supplemental payments this year. Flag those workers in your system before their next bonus check runs.

For the official rules, read the IRS Publication 15 supplemental wages section. For related guidance on employer tax obligations, start at our payroll tax hub.

This is not legal or financial advice. Consult a qualified professional for your specific situation.