According to the Internal Revenue Service, supplemental wages are compensation paid along with the employee's normal pay. Supplemental wages exist in various forms and the tax rate depends on a number of factors.
Supplemental wages include commissions, bonuses, severance pay, overtime compensation, retroactive pay, awards, prizes and accrued sick leave.
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If the supplemental wages are more than $1 million in a calendar year, the excess amount is taxed at 39.6 percent for 2013, or at the highest income tax rate for the year.
Supplemental wages that are equal to or less than $1 million can be combined and taxed with regular wages provided the specific amount of each is not stated.
If supplemental wages are paid separately from the employee's regular salary (or combined in a single payment but each amount is specified individually), the employer can withhold at a flat 25 percent in 2013.
Taxes for vacation pay should be withheld like regular wages. However, if the employee receives regular hourly pay and vacation pay during her vacation, it should be treated as supplemental income.