Which earnings are considered supplemental wages

All Credit Intel content is written by freelance authors and commissioned and paid for by American Express. The material made available for you on this website, Credit Intel , is for informational purposes only and is not intended to provide legal, tax or financial advice.

If you have questions, please consult your own professional legal, tax and financial advisors. Money Cards Credit Score Glossary. Facebook Twitter Linkedin Email. There are many ways you can earn supplemental income, from your employer or from side gigs, to help achieve your financial goals — but take note of the tax implications. Ways to earn supplemental income include: Commissions, overtime pay, or bonuses from your employer in addition to your regular pay.

Side gigs such as driving, teaching, consulting, or odd jobs. Getting Supplemental Income from Your Employer. Bonuses or awards. Payments for accumulated or unused time off. Identify the employee's regular wages. This could be the employee's current regular wages, or the regular wages paid for the previous payroll period if there are no current wages.

Add the supplemental wages to the regular wages and calculate the tax withholding on the combined amount based on the employee's Form W Identify the amount withheld from wages on the most recent pay date that only had regular wages and subtract this amount from the combined withholding amount.

Withhold the difference between the combined withholding amount and the withholding on the most recent pay date that only had regular wages from the employee's supplemental income.

There is one major exception to the above rules. In addition to federal income taxes on supplemental wages, many states also have rules for withholding state income taxes on supplemental wages, so each employer is obligated to check state rules as well. As a reminder, under certain circumstances you must use one of the three options above, or you may be precluded from using one of the above methods. We hope this guide makes it easier to differentiate between supplemental and regular wage payments, helping you to pay your team with confidence.

Check out our features here. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice.

If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor. Justworks helps businesses with their benefits, payroll, and everything else they need to take care of their team.

Monthly tips on running a business in your inbox. Thanks for subscribing! Solutions Solutions. Pricing Pricing. Plans Plans. About About. Resources Resources. Justworks Logo. Withholding social security and Medicare taxes on nonresident alien employees.

In general, if you pay wages to nonresident alien employees, you must withhold social security and Medicare taxes as you would for a U. The United States has social security agreements, also known as totalization agreements, with many countries that eliminate dual social security coverage and taxation.

Compensation subject to social security and Medicare taxes may be exempt under one of these agreements. Also see Pub. Tax Guide for Aliens. An exemption from social security and Medicare taxes is available to members of a recognized religious sect opposed to insurance.

This exemption is available only if both the employee and the employer are members of the sect. Under section z , a foreign person who meets both of the following conditions is generally treated as an American employer for purposes of paying FICA taxes on wages paid to an employee who is a U.

The foreign person is a member of a domestically controlled group of entities. The employee of the foreign person performs services in connection with a contract between the U.

Government or an instrumentality of the U. Government and any member of the domestically controlled group of entities. Part-time workers and workers hired for short periods of time are treated the same as full-time employees for federal income tax withholding and social security, Medicare, and FUTA tax purposes. Generally, it doesn't matter whether the part-time worker or worker hired for a short period of time has another job or has the maximum amount of social security tax withheld by another employer.

See Successor employer , earlier, for an exception to this rule. Income tax withholding may be figured the same way as for full-time workers or it may be figured by the part-year employment method explained in section 6 of Pub.

You must notify employees who have no federal income tax withheld that they may be able to claim a tax refund because of the EIC. This is because eligible employees may get a refund of the amount of the EIC that is more than the tax they owe.

If a substitute for Form W-2 is given to the employee on time but doesn't have the required statement, you must notify the employee within 1 week of the date the substitute for Form W-2 is given. If Form W-2 is required but isn't given on time, you must give the employee Notice or your written statement by the date Form W-2 is required to be given. If Form W-2 isn't required, you must notify the employee by February 8, Employers won't be subject to a failure-to-deposit FTD penalty for properly reducing their deposits if certain conditions are met.

For more information on reducing deposits, see Notice , I. For more information about the credit for qualified sick and family leave wages, go to IRS. For more information about the employee retention credit, go to IRS. Generally, you must deposit federal income tax withheld and both the employer and employee social security and Medicare taxes.

See How To Deposit , later in this section, for information on electronic deposit requirements. You may make a payment with a timely filed Form or Form instead of depositing, without incurring a penalty, if one of the following applies.

Separate deposit requirements for nonpayroll Form tax liabilities. Separate deposits are required for nonpayroll and payroll income tax withholding. Don't combine deposits for Forms or Form and Form tax liabilities. Generally, the deposit rules for nonpayroll liabilities are the same as discussed next, except the rules apply to an annual rather than a quarterly return period.

See the separate Instructions for Form for more information. There are two deposit schedules—monthly and semiweekly—for determining when you deposit social security, Medicare, and withheld federal income taxes. These schedules tell you when a deposit is due after a tax liability arises. Your tax liability is based on the dates payments were made or wages were paid. For taxable noncash fringe benefits, see When taxable fringe benefits are treated as paid in section 5. The deposit schedule you must use is based on the total tax liability you reported on Form , line 12, or Form , line 9, during a lookback period, discussed next.

Your deposit schedule isn't determined by how often you pay your employees or make deposits. See special rules for Forms and , later. Also see Application of Monthly and Semiweekly Schedules , later in this section. These rules don't apply to FUTA tax. See section 14 for information on depositing FUTA tax. The lookback period begins July 1 and ends June 30 as shown next in Table 1. Table 1. Lookback Period for Calendar Year The lookback period for a Form filer who filed Form in either or is calendar year The lookback period for for a Form filer is calendar year Your total tax liability for the lookback period is determined based on the amount of taxes you reported on Form , line 12, or Form , line 9.

For more information about deferring social security tax and these credits, see the Instructions for Form or the Instructions for Form Adjustments made on Form X, Form X, and Form X don't affect the amount of tax liability for previous periods for purposes of the lookback rule. The term "deposit period" refers to the period during which tax liabilities are accumulated for each required deposit due date. For monthly schedule depositors, the deposit period is a calendar month.

The deposit periods for semiweekly schedule depositors are Wednesday through Friday and Saturday through Tuesday. If you're an agent with an approved Form , the deposit rules apply to you based on the total employment taxes accumulated by you for your own employees and on behalf of all employers for whom you're authorized to act.

For more information on an agent with an approved Form , see Revenue Procedure , I. Under the monthly deposit schedule, deposit employment taxes on payments made during a month by the 15th day of the following month.

Monthly schedule depositors shouldn't file Form or Form on a monthly basis. Your tax liability for any quarter in the lookback period before you started or acquired your business is considered to be zero. Semiweekly deposit period spanning two quarters Form filers. If you have a pay date on Thursday, September 30, third quarter , and another pay date on Friday, October 1, fourth quarter , two separate deposits would be required even though the pay dates fall within the same semiweekly period.

Both deposits would be due Wednesday, October 6, Semiweekly deposit period spanning two return periods Form or Form filers. The period covered by a return is the return period. The return period for annual Forms and is a calendar year. If you have more than one pay date during a semiweekly period and the pay dates fall in different return periods, you'll need to make separate deposits for the separate liabilities.

For example, if you have a pay date on Wednesday, December 30, , and another pay date on Friday, January 1, , two separate deposits will be required even though the pay dates fall within the same semiweekly period.

Both deposits will be due Wednesday, January 6, 3 business days from the end of the semiweekly deposit period. Rose Co. However, for , Rose Co. If a deposit is required to be made on a day that isn't a business day, the deposit is considered timely if it is made by the close of the next business day. A business day is any day other than a Saturday, Sunday, or legal holiday.

For example, if a deposit is required to be made on a Friday and Friday is a legal holiday, the deposit will be considered timely if it is made by the following Monday if that Monday is a business day. Semiweekly schedule depositors have at least 3 business days following the close of the semiweekly period to make a deposit. For example, if a semiweekly schedule depositor accumulated taxes for payments made on Friday and the following Monday is a legal holiday, the deposit normally due on Wednesday may be made on Thursday this allows 3 business days to make the deposit.

For purposes of the deposit rules, the term "legal holiday" doesn't include other statewide legal holidays. Legal holidays occurring in are listed next. The terms identify which set of deposit rules you must follow when an employment tax liability arises. The deposit rules are based on the dates when wages are paid cash basis , not on when tax liabilities are accrued for accounting purposes. Spruce Co. It paid wages each Friday during May but didn't pay any wages during June.

Under the monthly deposit schedule, Spruce Co. Green, Inc. Although Green, Inc. The deposit, however, will be made under the semiweekly deposit schedule as follows: Green, Inc.

Under the semiweekly deposit schedule, liabilities for wages paid on Wednesday through Friday must be deposited by the following Wednesday. For example, Fir Co. On Monday, Fir Co. On Tuesday, Fir Co. Elm, Inc. On Friday, May 7, Elm, Inc. Because this was the first year of its business, the tax liability for its lookback period is considered to be zero, and it would be a monthly schedule depositor based on the lookback rules.

However, since Elm, Inc. It will be a semiweekly schedule depositor for the remainder of and for See IRS. Monthly schedule depositor. Deposit the shortfall or pay it with your return by the due date of your return for the return period in which the shortfall occurred. Semiweekly schedule depositor. Deposit by the earlier of:. The first Wednesday or Friday whichever comes first that falls on or after the 15th day of the month following the month in which the shortfall occurred, or.

The due date of your return for the return period of the tax liability. You must deposit employment taxes, including Form taxes, by EFT. See Payment with return , earlier in this section, for exceptions explaining when taxes may be paid with the tax return instead of being deposited. Call the toll-free number located in your "How to Activate Your Enrollment" brochure to activate your enrollment and begin making your payroll tax deposits.

If you outsource any of your payroll and related tax duties to a third-party payer, such as a payroll service provider PSP or reporting agent, be sure to tell them about your EFTPS enrollment. The number can be used as a receipt or to trace the payment. Eastern time the day before the date the deposit is due. If you use a third party to make a deposit on your behalf, they may have different cutoff times.

Eastern time the day before the date a deposit is due, you can still make your deposit on time by using the Federal Tax Collection Service FTCS to make a same-day wire payment. Please check with your financial institution regarding availability, deadlines, and costs. Your financial institution may charge you a fee for payments made this way. If you deposited more than the right amount of taxes for a quarter, you can choose on Form for that quarter or on Form for that year to have the overpayment refunded or applied as a credit to your next return.

Although the deposit penalties information provided next refers specifically to Form , these rules also apply to Form and Form The penalties won't apply if the employer qualifies for the exceptions to the deposit requirements discussed under Payment with return , earlier in this section.

Penalties may apply if you don't make required deposits on time or if you make deposits for less than the required amount. The penalties don't apply if any failure to make a proper and timely deposit was due to reasonable cause and not to willful neglect. If you receive a penalty notice, you can provide an explanation of why you believe reasonable cause exists. If you timely filed your employment tax return, the IRS may also waive deposit penalties if you inadvertently failed to deposit and it was the first quarter that you were required to deposit any employment tax, or if you inadvertently failed to deposit the first time after your deposit frequency changed.

The IRS may also waive the deposit penalty the first time you're required to make a deposit if you inadvertently send the payment to the IRS rather than deposit it by EFT. Late deposit penalty amounts are determined using calendar days, starting from the due date of the liability. If you filed Form for the prior year and file Forms for the current year, the FTD penalty won't apply to a late deposit of employment taxes for January of the current year if the taxes are deposited in full by March 15 of the current year.

Deposits are generally applied to the most recent tax liability within the quarter. If you receive an FTD penalty notice, you may designate how your deposits are to be applied in order to minimize the amount of the penalty if you do so within 90 days of the date of the notice. Follow the instructions on the penalty notice you received. For more information on designating deposits, see Revenue Procedure Cedar, Inc. It doesn't make the deposit on June On July 15, Cedar, Inc.

The penalty on this underdeposit will apply as explained earlier. If federal income, social security, or Medicare taxes that must be withheld that is, trust fund taxes aren't withheld or aren't deposited or paid to the U. If these unpaid taxes can't be immediately collected from the employer or business, the trust fund recovery penalty may be imposed on all persons who are determined by the IRS to be responsible for collecting, accounting for, or paying over these taxes, and who acted willfully in not doing so.

The trust fund recovery penalty won't apply to any amount of trust fund taxes an employer holds back in anticipation of the credit for qualified sick and family leave wages or the employee retention credit that they are entitled to. It also won't apply to applicable taxes properly deferred under Notice and Notice before January 1, A responsible person may also include one who signs checks for the business or otherwise has authority to cause the spending of business funds.

Willfully means voluntarily, consciously, and intentionally. A responsible person acts willfully if the person knows the required actions of collecting, accounting for, or paying over trust fund taxes aren't taking place, or recklessly disregards obvious and known risks to the government's right to receive trust fund taxes. Separate accounting when deposits aren't made or withheld taxes aren't paid.

Separate accounting may be required if you don't pay over withheld employee social security, Medicare, or income taxes; deposit required taxes; make required payments; or file tax returns. In this case, you would receive written notice from the IRS requiring you to deposit taxes into a special trust account for the U.

You may be charged with criminal penalties if you don't comply with the special bank deposit requirements for the special trust account for the U. Improperly completed Schedule B Form by, for example, entering tax deposits instead of tax liabilities in the numbered spaces. The FTD penalty is figured by distributing your total tax liability shown on Form , line 12, equally throughout the tax period. Then we apply your deposits and payments to the averaged liabilities in the date order we received your deposits.

We figure the penalty on any tax not deposited, deposited late, or not deposited in the correct amounts. Your deposits and payments may not be counted as timely because the actual dates of your tax liabilities can't be accurately determined.

You can avoid an "averaged" FTD penalty by reviewing your return before you file it. Follow these steps before submitting your Form Verify your total liability shown on Form , line 16, or the bottom of Schedule B Form equals your tax liability shown on Form , line Don't show negative amounts on Form , line 16, or Schedule B Form For prior period errors, don't adjust your tax liabilities reported on Form , line 16, or on Schedule B Form In addition to civil penalties, you may be subject to criminal prosecution brought to trial for willfully:.

Form must be filed by the last day of the month that follows the end of the quarter. See Calendar , earlier. If you receive written notification that you qualify for the Form program, you must file Form instead of Form If you received notification to file Form , but prefer to file Form , you can request to have your filing requirement changed to Form during the first calendar quarter of the tax year.

File your Form by February 1, However, if you timely deposited all taxes when due, you may file by February 10, The following exceptions apply to the filing requirements for Forms and Seasonal employers who don't have to file a Form for quarters when they have no tax liability because they have paid no wages.

To alert the IRS you won't have to file a return for one or more quarters during the year, check the "Seasonal employer" box on Form , line When you fill out Form , be sure to check the box on the top of the form that corresponds to the quarter reported.

Generally, the IRS won't inquire about unfiled returns if at least one taxable return is filed each year. However, you must check the "Seasonal employer" box on every Form you file. Otherwise, the IRS will expect a return to be filed for each quarter. If you file Form or Form for business employees, you may include taxes for household employees on your Form or Form Otherwise, report social security and Medicare taxes and income tax withholding for household employees on Schedule H Form Virgin Islands, or Puerto Rico.

If your employees aren't subject to U. If you have both employees who are subject to U. Agricultural employers reporting social security, Medicare, and withheld income taxes. Report these taxes on Form The IRS e-file program allows a taxpayer to electronically file Form or Form using a computer with an Internet connection and commercial tax preparation software.

Reporting agents filing Form , , or for groups of taxpayers can file them electronically. For details, see Pub. For information on electronic filing of Forms , , and , see Revenue Procedure , I. For information on the different types of third-party payer arrangements, see section Under certain circumstances, the IRS may waive the electronic filing requirement. For more information on filing a waiver request electronically, go to IRS. CPEOs are permitted to file a paper Form and its accompanying schedules in lieu of electronic submissions for the second, third, and fourth quarters of calendar year Also, for each whole or part month the tax is paid late, there is a failure-to-pay FTP penalty of 0.

For individual filers only, the FTP penalty is reduced from 0. You must have filed your return on or before the due date of the return to qualify for the reduced penalty. The penalties won't be charged if you have a reasonable cause for failing to file or pay.

In addition to any penalties, interest accrues from the due date of the tax on any unpaid balance. If income, social security, or Medicare taxes that must be withheld aren't withheld or aren't paid, you may be personally liable for the trust fund recovery penalty. See Trust fund recovery penalty in section Generally, the use of a third-party payer, such as a PSP or reporting agent, doesn't relieve an employer of the responsibility to ensure tax returns are filed and all taxes are paid or deposited correctly and on time.

Don't file more than one Form per quarter or more than one Form per year. Employers with multiple locations or divisions must file only one Form per quarter or one Form per year. Filing more than one return may result in processing delays and may require correspondence between you and the IRS. For information on making adjustments to previously filed returns, see section See the Instructions for Form or the Instructions for Form for information on preparing the form. If you go out of business, you must file a final return for the last quarter last year for Form in which wages are paid.

If you continue to pay wages or other compensation for periods following termination of your business, you must file returns for those periods. See the Instructions for Form or the Instructions for Form for details on how to file a final return.

Get a copy of Form or Form and separate instructions with a revision date showing the year, and, if applicable, quarter for which your delinquent return is being filed. Contact the IRS at if you have any questions about filing late returns. Table 3. Take the following steps to help reduce discrepancies. Report bonuses as wages and as social security and Medicare wages on Forms W-2 and on Form or Form Report both social security and Medicare wages and taxes separately on Forms W-2 and W-3, and on Form or Form Report the employee share of social security taxes on Form W-2 in the box for social security tax withheld box 4 , not as social security wages.

Report the employee share of Medicare taxes on Form W-2 in the box for Medicare tax withheld box 6 , not as Medicare wages. Don't report noncash wages that aren't subject to social security or Medicare taxes, as discussed earlier in Wages not paid in money in section 5, as social security or Medicare wages. Be sure the amounts on Form W-3 are the total of amounts from Forms W Reconcile Form W-3 with your four quarterly Forms or annual Form by comparing amounts reported for the following items.

Social security and Medicare taxes. Generally, the amounts shown on Forms or annual Form , including current year adjustments, should be approximately twice the amounts shown on Form W-3 because Form and Form report both the employer and employee social security and Medicare taxes while Form W-3 reports only the employee taxes.

Don't report backup withholding or withholding on nonpayroll payments, such as pensions, annuities, and gambling winnings, on Form or Form Withholding on nonpayroll payments is reported on Forms or W-2G and must be reported on Form Only taxes and withholding reported on Form W-2 should be reported on Form or Form Make sure there are valid reasons for any mismatch. See the Instructions for Schedule D Form if you need to explain any discrepancies that were caused by an acquisition, statutory merger, or consolidation.

If you utilized any of the COVID tax relief for , then, when reconciling Forms W-2 and W-3 to Forms or Form for , you should consider that paid qualified sick leave wages and qualified family leave wages aren't subject to the employer share of social security tax. Also, the deferred amount of the employee share of social security tax is reported on Form , or Form , but isn't reported on original Forms W-2 and W In certain cases, amounts reported as social security and Medicare taxes on Form , lines 5a—5d, column 2 Form , lines 4a—4d, column 2 , must be adjusted to arrive at your correct tax liability for example, excluding amounts withheld by a third-party payer or amounts you weren't required to withhold.

Current period adjustments are reported on Form , lines 7—9, or Form , line 6, and include the following types of adjustments. If there is a small difference between total taxes after adjustments and nonrefundable credits Form , line 12; Form , line 9 and total deposits Form , line 13a; Form , line 10a , it may have been caused, all or in part, by rounding to the nearest cent each time you figured payroll.

This rounding occurs when you figure the amount of social security and Medicare tax to be withheld and deposited from each employee's wages. The IRS refers to rounding differences relating to employee withholding of social security and Medicare taxes as "fractions-of-cents" adjustments.

To determine if you have a fractions-of-cents adjustment for , multiply the total wages and tips for the quarter subject to:. Social security tax reported on Form or Form by 6.

Medicare tax reported on Form or Form by 1. Additional Medicare Tax reported on Form or Form by 0. Finally, if your employer pays you an allowance or reimbursement that exceeds your actual expense, you must refund the excess. Supplemental wages tax rates There are two different supplemental withholding rates that can apply, depending upon the amount of supplemental wages you receive during a single year and depending upon whether the supplemental wages are paid as a separate payment or paid with your regular wages.

If your employer does not designate your pay as supplemental wages and includes it with your regular wages, the supplemental withholding rate does not apply and taxes are withheld using the information you provided on Form W If your supplemental wages are identified separately from your salary as a bonus, for example , your employer must withhold taxes using one of the following two methods: Withhold at the supplemental rate of 25 percent or Combine your regular wages for the pay period with your supplemental wages and treat the total as one payment of regular wages and then withhold taxes using ordinary withholding rates.

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