University of Minnesota
Office of Human Resources
http://www.umn.edu/ohr
612-625-2016

Supplemental Tax Withholding

Although income taxes on wages are generally withheld using IRS percentage method and the State rate formulas or tables, some taxes are withheld at "supplemental" rates. Those rates may be calculated at either the percentage method or flat rate method, depending on how the supplemental wages are paid—combined with regular wages, or paid out separately.

The IRS defines supplemental wages as compensation paid in addition to the employee's regular wages that includes, but is not limited to, severance or dismissal pay, vacation pay, back pay, bonuses, moving expenses, overtime, taxable fringe benefits, and commissions.

Currently, the IRS flat supplemental rate is 25 percent. The University will apply the supplemental rate of withholding to the following supplemental wages:

  • Athletic Contract Supplement
  • Bonus or Commission
  • Late Pay
  • Layoff, Non-Renewal
  • Miscellaneous Taxable Benefit/Compensation
  • Moving Expenses Taxable Benefit
  • Non-Qualified Deferred compensation
  • Relocation Lump Sum
  • Retirement Contribution
  • Settlement Awards
  • Special Payment (as defined by the Office of Tax Reporting and Compliance)
  • Terminal Agreement
  • Vacation Payout

Calculating Supplemental Tax Rate

Supplemental wages are specified as those types of wages as noted above. They are identified as separate earnings types without regard to whether they are paid alone on a separate check or with other types of earnings on the same check. The method used to calculate the income tax withheld from the supplemental pay depends upon whether income taxes were withheld from the last regular wages paid to the employer during a normal pay cycle.

If income taxes were withheld from the employee's most recent regular pay cycle this year, then the supplemental wages will be withheld at the flat supplemental rate. If, however, income taxes were not withheld from the employee's most recent regular pay cycle this year - or the employee had no previous pay this calendar year - then income taxes area withheld using the aggregate method.

The aggregate method means that the taxable supplemental wages and taxable regular wages are added together for calculation purposes and taxes are withheld according to the number of allowances claimed on form W-4 for that period.

The supplemental tax rates are also used to calculate a gross-up.  Gross-up is defined as "An IRS-approved formula that employers can use to determine the taxable gross payment when the employer wishes to pay the employee's share of tax".