What is supplemental pay?

Supplemental pay refers to additional payments given to employees on top of their regular wages, such as bonuses, commissions, and overtime pay. It serves as an incentive for employees to achieve their job targets.

Regular pay constitutes the contracted hourly or monthly salary received by employees and is subject to normal taxation, while supplemental wages are taxed differently.

Understanding the role of supplemental wages is crucial for HR practitioners in motivating workers and fostering a positive work culture.

Supplemental wages vs regular wages

Regular wages are paid on a payroll period basis, while supplemental wages are extra payments based on various incentives and are taxed at a flat rate in the US.

What qualifies as supplemental pay

Supplemental pay includes earnings, not part of an employee’s base income. Employers or HR leaders can give employees supplemental pay as part of incentives or as a legal requirement when employees work overtime.

TIPS

Supplemental pay can be a sensitive issue, so provide employees with transparent and timely communication about it. Inform them about the criteria for receiving supplemental pay, such as meeting specific performance metrics, and communicate any changes in supplemental pay policies in advance.

Earnings that are part of supplemental wages include:

• Commissions
• Overtime pay
• Bonuses
• Vacation lump sum payments
• Awards
• Accumulated sick leave payments
• Reported tips
• Back pay
• Wages paid under reimbursements, such as travel reimbursements.
• …

Employers can opt for packaged overtime pay and tips as part of an employee’s regular wages.

What does not qualify as supplemental pay?

Certain payments like paid time off (PTO), stipends, and vacation pay are not considered supplemental wages as they are part of an employee's regular income.

How are supplemental wages taxed?

The taxation of supplemental wages depends on the amount earned by the employee. Different tax rates apply based on earnings, and exemptions can be sought through Form W-4.

How to calculate supplemental pay

Supplemental pay can be calculated separately or combined with regular wages, with different tax rates applicable based on the amount earned. Employers need to withhold taxes accordingly.

What should HR consider with supplemental pay?

HR should consider the role of supplemental pay in motivating employees, maintain transparency in tracking supplemental wages, ensure compliance with tax withholding rules, and seek assistance from professionals when needed.