How should employers report supplemental wages like bonuses and overtime on Form W-2?
Executive summary
Supplemental wages — bonuses, overtime, commissions, reported tips and similar irregular payments — are taxed and reported like regular wages on Form W‑2 but have special withholding rules employers can use (aggregate or optional flat rates) and must be included in the year‑end totals employers submit to the SSA and IRS (Pub. 15; Pub. 15‑A) [1] [2]. Employers report supplemental amounts aggregated with regular pay in Box 1 and in the applicable FICA boxes and withholding boxes on Form W‑2 rather than as a separate line item, although certain items can be separately shown in box 14 or box 12 when the IRS requires specific codes (about Form W‑2; Pub. 15‑A; Pub. 15‑B) [3] [2] [4].
1. What counts as supplemental wages and why they matter for withholding
Supplemental wages are additional payments outside regular pay — for example bonuses, commissions, overtime paid separately, reported tips and retroactive pay — and the IRS treats them as part of an employee’s taxable wages for income tax and generally for Social Security and Medicare taxes as well, so employers must include them in wage reporting and withholding calculations (Pub. 15; Pub. 15‑A; Topic No. 401) [1] [2] [5]. Because these payments are irregular, the IRS provides special withholding procedures to avoid under- or over‑withholding when supplemental wages are paid, and they affect both payroll withholding and the employer’s quarterly and annual employment tax returns (Pub. 15; Understanding employment taxes) [1] [6].
2. Two withholding approaches: aggregate method or flat rates
For federal income tax withholding, employers may either combine supplemental wages with regular wages for the payroll period and compute withholding using the employee’s Form W‑4 (the aggregate method), or apply the optional flat rate method — a single percentage applied to supplemental wages — when the required conditions are met; the Treasury regulations and Publication 15 explain both options and the mechanics employers must follow (26 CFR §31.3402(g)‑1; Pub. 15) [7] [1]. For 2026 and recent guidance the common flat rate for supplemental wages under $1,000,000 has been 22%, while amounts over $1,000,000 in a calendar year are subject to a higher mandatory flat withholding (regulation examples and IRS guidance describe the $1,000,000 threshold and higher rate for excess amounts) [7] [8].
3. How to report supplemental wages on Form W‑2
Supplemental wages are not shown on a separate W‑2 line; they are aggregated with regular wages and reported in Box 1 as wages, tips, and other compensation, and also in Box 3 (Social Security wages) and Box 5 (Medicare wages) as applicable, with the corresponding tax withheld reported in Boxes 4 and 6 — the Form W‑2 and IRS publications require these amounts to reconcile with quarterly returns like Form 941 and annual filings (Pub. 15‑A; About Form W‑2; General Instructions for Forms W‑2 and W‑3) [2] [3] [9]. Certain special items (for example particular fringe benefits or designated amounts) may need separate reporting codes in Box 12 or an informational notation in Box 14 as detailed in Publication 15‑B and Pub. 15‑A (Pub. 15‑B; Pub. 15‑A) [4] [2].
4. Special categories: tips, statutory employees, and large payments
Tips reported by employees are taxable supplemental wages that employers must include in withholding calculations and on Form W‑2, and employers have extra responsibilities when tips are common in a workplace (monthly reporting by employees and potential allocation requirements) (FileLater; Pub. 15) [10] [1]. Statutory employees receive payments reported as “other compensation” on Form W‑2 and may be able to deduct business expenses, but employers still show those payments in Box 1 and the applicable FICA boxes and check the statutory employee box on the W‑2 as directed in Publication 15‑A (Pub. 15‑A) [2]. If supplemental wages in a year exceed the $1,000,000 threshold, different withholding rules apply and employers must follow the higher withholding rate and regulatory instructions for those excess amounts (26 CFR; Pub. 15) [7] [1].
5. Practical compliance and reconciliation obligations employers cannot ignore
Employers must ensure W‑2 totals reconcile with payroll returns (Form 941 and Form 940 where applicable) because the W‑2 aggregates all wages and withholding for reporting to the SSA and IRS, and errors require corrected W‑2c and potential other corrections — IRS instructions and publications provide procedural guidance and contact resources for technical questions (Understanding employment taxes; General Instructions for Forms W‑2 and W‑3) [6] [9]. Payroll systems should consistently apply the chosen withholding method, track tips and other supplemental categories correctly, and apply box‑specific reporting rules laid out in Publications 15, 15‑A, 15‑B and the W‑2 instructions to avoid reconciliation mismatches and penalties (Pub. 15; Pub. 15‑A; Pub. 15‑B) [1] [2] [4].