Supplemental Pay for Employees: Meaning, Types & FAQs

Supplemental pay is becoming an important part of many compensation plans. It can motivate employees and improve job satisfaction when done right. Companies use it to attract and keep top talent, but if the plan isn’t well-designed, it can hurt employee morale and business results.

Before launching a pay program, organizations should understand the basics, from the supplemental pay meaning and the types to offer to benefits and frequently asked questions.

Supplemental pay meaning

Supplemental pay refers to extra compensation that employees receive in addition to their regular wages or salary. This can include various types of pay such as overtime, bonuses, commissions, and shift differentials. Organizations provide supplemental income to reward employees for their extra efforts, working under tough conditions, or achieving specific goals.

Here are some examples of supplemental wage payments:

• Bonuses (e.g., ratification bonuses, etc.)

• Back pay

• Longevity payments

• Vacation lump sum payments

• Sick pay provided by a third party

Supplemental wages, such as bonuses and equity, are easy to manage and plan with Salary.com's Compensation Planning Software. The tool also helps prevent errors and improve accuracy in your compensation planning.

Supplemental pay benefits

Incorporating supplemental income into your compensation strategy can provide valuable benefits within your workforce. Here’s how it can help your business:

• Increased employee motivation: Additional payment, like bonuses or performance incentives, can increase employee motivation and productivity. When employees know they can earn extra money for achieving goals, they are more likely to work harder.

• Improved retention rates: Offering supplemental income can help keep top talent. Employees are more likely to stay with a company that rewards their hard work with extra compensation.

• Attracting top talent: Competitive compensation packages with additional payment can attract top candidates. This gives your business an advantage in the job market.

• Improved job satisfaction: Employees who receive the pay often feel valued and appreciated, leading to greater job satisfaction and a more positive work environment.

• Flexibility in compensation: It offers flexibility in employee compensation. You can customize bonuses and incentives to match company goals and individual performance.

• Encouraging desired behaviors: Linking it to specific behaviors or achievements helps you encourage employees to prioritize key areas for the business, such as customer service, sales targets, or innovation.

Another way to encourage desired behaviors is by clearly communicating pay or reporting supplemental pay to your employees. Salary.com's Compensation Planning Software simplifies sharing the full range of benefits and compensation, including bonuses and other supplemental income.

Supplemental pay vs regular pay

The difference between supplemental and regular wages is that supplemental payment includes wages that vary from period to period, such as back pay, bonuses, and taxable fringe benefits. In contrast, regular pay is the amount an employer pays for a specific payroll period, either at a regular hourly rate or a fixed amount.

In terms of withholding practices, regular wages are taxed based on marital status and withholding allowances using the Percentage Method with an annual payroll period. Supplemental wages are taxed at a flat rate of 22%, in accordance with IRS rules. For example, if you pay out a bonus, you must withhold federal income tax at a flat rate of 22%.

Supplemental pay types

Here are supplemental pay types: commission pay, overtime pay, bonuses, back pay, longevity payments, vacation pay, sick pay provided by a third party, severance pay, and tips.

What qualifies as supplemental income?

1. Commission pay: Earnings based on a percentage of sales or revenue generated.

2. Overtime pay: Extra pay earned for working more than the standard workweek at a rate of 1.5 times the regular hourly wage, according to the Fair Labor Standards Act (FLSA).

3. Back pay: Compensation owed for past work that was not paid for at the time.

4. Longevity payments: Payments given to employees based on their length of service.

5. Tips: Gratuities received directly from customers.

6. Vacation lump sum payments: A lump sum payment received in lieu of taking vacation time.

7. Severance pay: Payment given to an employee upon termination of employment.

8. Bonuses: Additional payments given as rewards for performance, achievements, or other reasons.

9. Sick pay provided by a third party: Sick pay benefits provided by an insurance company or other external source.

Compensation Planning Software lets you manage all your compensation plans, including supplemental wages like bonuses and equity, in one place. It combines talent management, salary planning, and direct compensation strategies, simplifying the process by removing manual tasks.

What does not qualify as supplemental pay?

1. Employee's regular wages or hourly salary: Base pay for regular hours of work.

2. Stipends: Fixed payments given for specific purposes, such as relocation or education.

3. Reimbursements for business expenses: Payments to cover expenses incurred for work-related purposes.

4. Fringe benefits: Benefits provided by an employer, such as health insurance, retirement plans, or paid time off.

5. Paid time off (PTO): Time off from work that is paid for, such as vacation, sick leave, or personal leave.

Supplemental pay tax rules

So, how are supplemental wages taxed? Additional payments are taxed at a flat rate of 22% (as of 2024). These wages are calculated using this percentage and include payments like bonuses, commissions, and overtime pay, which are not regular wages.

According to IRS Publication 15, the tax rules for supplemental income vary based on whether they are paid separately or combined with regular wages. If paid separately, employers can withhold 22% as withheld income tax. If combined, the withholding depends on the employee’s Form W-4. For bonuses over $1 million, the withholding rate is 37%.

Employers should also consider Social Security, Medicare, and federal unemployment tax (FUTA) when calculating withholdings for supplemental earnings. Following IRS guidelines and keeping proper documentation is important for compliance.

FAQs

Now that you know the supplemental pay meaning and its tax rules, let's answer some common questions.

Is supplemental pay good?

Yes, supplemental income is a positive addition to an employee's compensation package. However, the benefits can differ based on the type of supplemental earning (like overtime, bonuses, or commissions) and the employer's policies.

What is the purpose of a supplementary payment?

The purpose of a supplementary payment is to provide extra money beyond the agreed-upon amount for various reasons, including cost increases, contract terms, adjustments, and bonuses or incentives.

What is the IRS definition of supplemental wages?

The IRS defines supplemental wages as "wages that are not regular wages and that vary from pay period to pay period."

Why is supplemental income taxed higher?

Supplemental income is taxed at a higher rate because it is often irregular or unpredictable, which raises concerns about underpayment of taxes. To address this, the IRS requires a higher withholding rate on employee’s supplemental wages.

Why offer supplemental benefits?

Offering supplemental benefits is a smart way for employers to attract and retain top talent in today’s competitive job market. A survey shows that among employees looking for a new job, health insurance, a supplemental benefit, is the third most sought-after benefit, with 42% expressing interest in receiving it from an employer.