How are supplemental wages taxed for federal income tax withholding?

• A. They are exempt from withholding.
• B. They may be withheld using the flat percentage method (commonly 22%) or using the aggregate method with regular wage withholding.
• C. They must be withheld using a higher rate.
• D. They are taxed only at year-end.

Answer: (B)

Supplemental wages can be taxed for federal income tax withholding using two approved methods. One is the flat percentage method, where a fixed rate (commonly 22%) is applied to the supplemental amount. The other is the aggregate method, where the supplemental amount is added to the employee’s regular wages for the same pay period and withholding is calculated as if the total were a single payment, using the employee’s W-4 allowances and tax tables. Employers have the option to use either method, and the choice determines how withholding is computed for supplemental pay. This makes the statement that they may be withheld either by the flat 22% method or by the aggregate method with regular wage withholding the correct description.