Payroll and Taxes

Supplemental Tax Rates by State

Hannah Rau
January 21, 2024
min read

Usually, when you're paying your employees regular hourly or salary wages, it's a pretty simple process. But things can get a bit tricky when you start adding commissions and bonuses into the mix. That's when you might need to use a supplemental flat tax rate for federal and state income taxes. 

It's worth noting, though, that not all states make this mandatory. So, it's a good idea to check out the supplemental tax rates by state to see if your state requires it.

But first, let’s find out what is supplemental tax!

What is Supplemental Tax?

Supplemental tax is an additional tax imposed on certain types of income that are not regularly accounted for in typical salary or hourly wage payments. It is commonly applied to supplemental wage payments, such as bonuses, commissions, overtime pay, and other forms of compensation beyond regular wages. 

Employers may use a supplemental tax rate, which is often a flat rate, to withhold taxes on these extra earnings. This ensures that the appropriate amount of taxes is withheld, considering the unique nature of these payments. The goal is to prevent under-withholding and help employees meet their tax obligations.

What is a State Income Tax, and How does It Differ from Supplemental Income Tax?

State income tax is applied to an employee's regular wages, with the state determining the amount to withhold through various methods. This may involve progressive taxation, where the tax rate increases with higher wages, or a flat tax rate uniformly applied to all income levels.

The supplemental income tax rate is relevant for various forms of supplemental income, including bonuses, commission pay, awards, prizes, back pay, retro pay increases, overtime pay, payments for accrued sick leave, and payouts for paid time off or vacation. The supplemental tax rate ensures appropriate withholding for these additional earnings, preventing inadequate tax payment on such irregular income sources.

Do Employers Have to Use a Supplemental Tax Rate? 

The answer can vary depending on state laws, but generally, employers have the flexibility to decide whether to use supplemental tax rates. 

However, in certain states, the use of the supplemental tax rate may hinge on how the employee's supplemental pay is paid.

When paying supplemental wages separately, such as through a second payroll run for commission pay, use the supplemental tax rate. This applies if income tax was withheld from regular wages during the same year or the previous year.

On the other hand, when paying supplemental wages with standard wages in the same payroll without separately detailing them on payroll records, the supplemental tax rate should not be used. In this case, payroll and tax processes should proceed as usual.

Rules regarding the payment and taxation of supplemental wages can vary among states. You should check with your state authorities for specific information!

Do Supplemental Tax Rates Change?

Yes, supplemental tax rates can change, and they may vary between federal and state levels. The Internal Revenue Service (IRS) sets the federal supplemental tax rate, and it can be adjusted periodically. Employers should stay informed about any updates or changes to the federal supplemental tax rate.

On the state level, supplemental tax rates can also be subject to change based on state regulations. State laws may differ, so employers need to be aware of any modifications to supplemental tax rates in the states where they operate.

It's advisable for employers to regularly check for updates from both federal and state tax authorities to ensure compliance with the latest rates and regulations. This helps in accurately withholding the correct amount of taxes from supplemental wages.

Supplemental Tax Rates by State

Now, let’s have a look at supplement tax rates by state:

Supplemental Tax Rate Example

Let's consider an example of an employee in California who receives a bonus:

Employee's bonus: $5,000

California has different supplemental tax rates for bonuses and stock options (10.23%) compared to other supplemental income (6.6%).

  1. Calculate tax on bonus:
  • Bonus Tax = Bonus Amount × Bonus Tax Rate
  • Bonus Tax = $5,000 × 10.23%
  • Bonus Tax = $511.50
  1. Calculate take-home pay:
  • Take-Home Pay = Bonus Amount - Bonus Tax
  • Take-Home Pay = $5,000 - $511.50
  • Take-Home Pay = $4,488.50

In this example, the employee would receive a take-home pay of $4,488.50 after accounting for the supplemental tax on the bonus. Keep in mind that tax calculations can vary based on individual circumstances, so it's advisable to consult with a tax professional for accurate advice.

Bottom line

Understanding and managing supplemental tax rates can be complex, but with the support of a convenient payroll software like, the process becomes manageable. automates tax calculations based on employee information, providing a time-saving and accurate solution.

Try it today to simplify your supplemental tax management!

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