Employers are required to withhold federal tax from supplemental wages paid to employees. These include bonuses, commissions, reimbursements (so long as you don’t have an accountable plan), severance, cash prizes, retroactive raises and taxable fringe benefits. If you pay a supplemental wage of $1 million or less separately from regular wages, you must either 1) withhold 22% or 2) add the supplemental wage to the employee’s regular wages and withhold at the ordinary rate. Supplemental wages paid with regular wages are subject to ordinary withholding. For supplemental wage payments over $1 million, withhold tax on the excess at the highest rate, currently 37%.
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