How to Handle Supplemental Pay in California
As employers, we all (most of us anyway) love sharing commissions, profits, or performance bonuses with our employees, because we know they’ve worked so hard to achieve a particular goal. Employees get excited too! You can imagine however, the disappointment when they realize they’ve jumped up a tax bracket (or two) and get killed with taxes on that bonus. Ouch!
There are a couple of different ways to help employees deal with this, and as an employer, it’s important to have an understanding of how the IRS and your state view the taxes due on these supplemental wages.
Let’s look at how bonuses are taxed related to the Federal Government and California (other states may vary).
Like regular pay, supplemental pay is subject to both federal and state tax. Many believe that bonus pay is just like a regular paycheck, but that’s generally not the case. Bonuses and commissions are typically considered supplemental income and is taxed at a different rate unless the pay is included with regular payroll.
What are Considered Supplemental Wages?
Supplemental wages are additional pay you give employees on top of regular wages. The following are considered supplemental wages:
How is Supplemental Pay Taxed?
Percentage Method: If the supplemental pay is paid to the employee in a separate check, it must be taxed at the supplemental tax rate. The federal supplemental tax rate is 22%. In California, the supplemental rate is 10.23%. For example, if you earned a bonus in the amount of $5,000, you would owe $511.50 in taxes on that bonus to the state of California and $1100.00 to the Federal Government.
This may not seem fair but consider the consequences if you simply add the additional pay to the employee’s regular paycheck…the tax rate could even get bumped higher, and the employee would pay a higher tax on their entire paycheck.
Aggregate method: The aggregate method is a little more complex than the percentage method. For the aggregate method, you will add the bonus wages to the regular wages that are paid at the same time. This involves averaging out the regular pay tax and the supplemental pay tax and subtracting the difference. Complicated! And in some cases, the aggregate method may not necessarily result in lower taxes, due to the progressive nature of taxes, the taxes could be higher. Please contact Infinium for more info.
Other taxes
As you can expect, you will also be required to withhold SDI, FICA and Medicare tax from your employees’ bonus wages. The FICA and Medicare tax rate is still the standard 7.65% on bonus pay and SDI is 1.2%.
Can Employees Request a Different Tax Rate?
Generally, no. Although rare, there may be certain circumstances where the supplemental tax rate is not applied. The employer is required to withhold taxes at the supplemental tax rate. Many times, employees will want to reduce or exempt themselves from payroll taxes on larger supplemental wages, but it is up to you, the employer, to comply with the legal requirements.
Head Spinning Yet?
All of this can make your head spin, especially if you’re calculating these different federal income taxes for many employees. If you’re looking for payroll support, contact the Payroll experts at Infinium HR!
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