How does an employer determine the amount of federal income tax to withhold from an employee's supplemental wages?
Separate Wages: When supplemental wages are differentiated from regular wages, the federal income tax withholding method depends partly on whether or not you normally withhold income tax from the employee's regular wages.
- If you normally withhold income from the employee's wages, you can use one of the following methods to determine supplemental income tax withholding:
- Withhold a flat 25% from supplemental wages (Note: no other percentage may be used); OR
- Add the supplemental wages to the employee's most recent (past - not current) pay. Determine what the federal income tax withholding would have been on the total and subtract the federal income tax withholding on the current regular wages. The difference is withheld as supplemental income tax.
- If you do not normally withhold income from the employee's wages, generally because the number of allowances claimed on Form W-4 exceeds wages, using the second option in item 1 above.