Getting a supplemental pay combined with regular pay is a great incentive for employees, but it can be a bit of a headache for your HR department to find out what supplemental pay is and what that means for taxation.
On this page, we quickly explain the concept of supplementary pay, how it differs from regular pay, and how it is taxed.
Supplemental pay refers to any type of payment that an employee receives that is not part of their regular salary. For example, this could be a bonus for achieving performance goals, or compensation for overtime.
Employees are not entitled to supplemental pay, but it may still be part of their contract as an incentive for the employer. It is also possible for employees to receive additional pay without prior notice, such as as as a year-end bonus.
Example of supplementary salary:
Bonus payouts. Overtime compensation.
Accrued and unused sick leave.
Commissions and gratuities.
Severance pay. Debt.
Retroactive raises. Pay for non-deductible relocation expenses.
Taxable fringe benefits.
Earnings from awards or prizes.
It is worth noting:Holiday pay does not necessarily fall under the category of supplementary pay as it is usually part of the regular salary. However, if all vacation time is not used and therefore paid in a lump sum, it does qualify as supplemental income.
The main difference between supplementary wages and regular wages is how the income is taxed. While wages are subject to income tax, it is not that simple when it comes to supplementary payments, but it depends on the type of payment. In addition, there are various ways to report compliance with supplementary pay.
Another difference between wages and supplemental pay is that wages are usually paid after a scheduled payroll period. Supplemental pay, on the other hand, usually does not follow a specific payment frequency. In most cases, it is up to the employer to decide when to issue supplementary payments to employees.
Finally, while employers must pay employees for their work, they are not obligated to pay additional fees. Some employers may choose to do so freely, while others may include a paragraph in the contract outlining the additional payment.
Calculating the tax rate on supplementary pay is highly dependent on two things: the tax laws of a particular country and the amount of supplementary income.
In general, many countries allow supplementary pay to be simply added to the regular salary and income tax is withheld on this total amount. However, this option may only be available if the additional payment has been combined with the salary in a transaction and the individual amount is not specifically mentioned.
However, if supplemental pay is paid in a separate transaction, your employees may be able to apply a reduced tax rate to the additional payment. In the United States, for example, this reduced tax rate is currently set at 22%.
Please note:The tax rate for additional wages must be calculated according to local tax regulations and is different for each country.