A net bonus of $2,000 is paid as supplemental wages in a no-income-tax state. Using the current option flat tax rate and the Social Security and Medicare rates, what is the gross amount of the payment?

• A. $2,969.56
• B. $2,906.98
• C. $2,666.67
• D. $2,883.92

Answer: (A)

When supplemental wages are taxed using the flat rate method, you withhold a fixed federal income tax percentage on the supplemental amount and also withhold the employee portions of Social Security and Medicare (FICA). In a no-income-tax state, there’s no state tax to withhold, so only federal tax and FICA apply.

Let the gross supplemental pay be G. The federal withholding on supplemental wages is 25% (the flat rate), and FICA totals 7.65% (6.2% for Social Security plus 1.45% for Medicare). The total withholding is 0.25 + 0.0765 = 0.3265 of G. The net the employee takes home is G minus this withholding, i.e., 0.6735 × G. Set this equal to the net bonus of 2,000 and solve for G:

0.6735 × G = 2,000

G = 2,000 / 0.6735 ≈ 2,969.56

So the gross amount of the payment is about $2,969.56.