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Repair common Windows errors and clear accumulated junk for a smoother, more stable PC - no reinstall needed.Free scan · no reinstallFor 2026, an employer may generally withhold federal income tax on separately identified supplemental wages at an optional flat 22% if it withheld income tax from the employee’s regular wages in 2026 or 2025. The employer may instead use the aggregate method. If it did not withhold income tax from regular wages in either year, it must use the aggregate method. Once the employee’s supplemental wages for the calendar year exceed $1 million, the amount above that threshold is subject to mandatory 37% withholding.
What counts as supplemental wages?
The IRS defines supplemental wages as wage payments to an employee that are not regular wages. The category can include bonuses, commissions, overtime, accumulated sick leave, severance, awards, prizes, back pay, reported tips, retroactive pay increases, taxable fringe benefits, and certain expense allowances. Employers may elect to treat overtime pay and tips as regular wages.
Whether a payment is supplemental does not by itself determine the withholding method. The way payroll identifies and combines it with regular wages matters too.
Choose the withholding method
| Payroll situation | Federal income-tax withholding treatment |
|---|---|
| Regular and supplemental wages are paid together, and their amounts are not specified separately | Withhold as if the total were one regular payment for that payroll period. |
| Supplemental wages are paid separately, or combined with regular wages but separately identified; regular-wage income tax was withheld in 2026 or 2025 | The employer may use the optional 22% flat method or the aggregate method. |
| Supplemental wages are paid separately or separately identified; no regular-wage income tax was withheld in 2026 or 2025 | Use the aggregate method. |
| Cumulative supplemental wages paid to the employee in 2026 exceed $1 million | Withhold 37% on the portion above $1 million. The mandatory rate applies regardless of Form W-4. |
The IRS’s 2026 rule counts payments from businesses under common control when determining whether the employee has crossed the $1 million threshold. For the detailed procedures and current-year tables, see IRS Publication 15 (2026), section 7, and IRS Publication 15-T (2026).
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How the optional 22% method works
The 22% flat rate is an option for the employer, not an automatic rate for every bonus or other supplemental payment. It is available for qualifying separately identified supplemental wages when the employee had income tax withheld from regular wages in the current or immediately preceding calendar year. The 2026 IRS rate is for federal income-tax withholding; it does not establish the employee’s final tax rate.
How the aggregate method works
The employer adds the supplemental amount to the applicable regular wages, calculates withholding on the combined amount using the regular payroll procedure, and subtracts tax already withheld. If no income tax was withheld from regular wages in either the current or immediately preceding year, the IRS directs the employer to use this method.
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How the $1 million rule works
The 37% rate applies only to the part of an employee’s supplemental wages that exceeds $1 million during the calendar year, not automatically to the entire bonus or other supplemental payment. The threshold is based on the employee’s cumulative supplemental wages, including qualifying payments from businesses under common control.
What this means for bonuses and overtime
Bonuses
A bonus is a common example of supplemental wages. If it is separately identified, the employer’s choice between the optional 22% method and aggregate method depends in part on whether income tax was withheld from regular wages in 2026 or 2025. If bonus and regular wages are paid together without separate amounts, payroll treats the total as one regular payment for that period.
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Overtime
Overtime can be treated as supplemental wages, but the IRS allows employers to treat overtime pay as regular wages. Publication 15 (2026) also describes a qualified overtime compensation deduction of up to $12,500 for an individual or $25,000 for married taxpayers filing jointly, for tax years beginning after 2024 and ending before 2029. It describes qualified overtime as compensation above the regular rate, such as the half portion of time-and-a-half pay required under the Fair Labor Standards Act. This potential individual deduction does not make overtime exempt from withholding: overtime remains subject to federal income-tax withholding and generally to Social Security, Medicare, and FUTA taxes. An employee may submit an updated Form W-4 to account for an expected deduction in withholding; employers use Publication 15-T procedures for that purpose. See Publication 15 (2026) and Publication 15-T (2026).
Taxable fringe benefits
For taxable fringe benefits, employers may add the benefit’s value to regular wages for a payroll period and calculate withholding on the total, or use the optional 22% supplemental-wage rate, subject to the $1 million rule. Applicable employment-tax and deposit rules still apply. The IRS explains these options in Publication 15-B.
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Income-tax withholding is not the same as total tax
The 22% and 37% figures are federal income-tax withholding rates. They do not determine the employee’s final income-tax liability. Supplemental wages are also subject to Social Security, Medicare, and FUTA taxes under the IRS employer guidance; those employment taxes are separate from federal income-tax withholding.
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This article covers U.S. federal employer withholding under the IRS’s 2026 publications. It does not calculate an individual employee’s withholding or final tax bill, and it does not cover state or territorial rules. The IRS cautions that its federal income-tax withholding references do not apply to employers in American Samoa, Guam, the Northern Mariana Islands, the U.S. Virgin Islands, or Puerto Rico unless they have employees subject to U.S. income-tax withholding; separate local rules may apply. Use the publication and tables for the relevant tax year, since IRS editions are updated annually. Publication 15-T itself excludes cases handled by the supplemental-wage flat-rate methods. For related employer-tax context, see IRS Publication 15-A.
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