Supplemental pay is an employee's additional income or compensation on top of their regular base earnings.
Supplemental pay is also referred to as supplemental income and includes an employee’s additional earnings, such as overtime, bonuses, or sick pay.
Supplemental pay types
Supplemental pay types include additional earnings and benefits not included in an employee’s base wages or salary. Examples of supplemental pay types include but are not limited to:
- Overtime. The employee earns extra pay for working beyond a statutory workweek. Overtime pay amounts vary by country.
- Bonuses. Employers offer additional pay to employees as a motivating incentive or performance reward. Common types include signing, referral, and retention bonuses.
- Commissions. Employees earn merit-based payments. For example, some employers pay a portion of a total sale to the employee who made the sale.
- Accumulated or unused sick pay. Employers pay out any unused sick leave in the form of supplemental wages.
- Severance pay. An employee receives additional compensation when they leave their position or are terminated.
- Vacation pay. While vacation pay does not typically qualify as supplemental pay, it can if an employer pays out any unused vacation hours or days as a lump sum to an employee.
This list does not capture all forms of supplemental pay, and employers may choose to offer additional benefits as part of their compensation plan.
Supplemental pay types also vary based on the employee’s country of residence. When calculating total employee costs, employers must determine which supplemental payments to include in employment contracts.
What does not qualify as supplemental pay?
Supplemental benefits that do not qualify as supplemental pay include types of non-wage compensation. These benefits are often included in an employee’s regular income or are provided to help offset certain expenses.
Benefits that typically do not qualify as supplemental pay include additional paid time off, additional sick or parental leave, supplemental healthcare, and relocation assistance.
Differences between supplemental pay and regular pay
Supplemental pay and regular pay are not the same. Supplemental pay differs from regular pay based on payment schedule, employee entitlements, and taxation:
Pay cycle
Employers do not have to pay out supplemental wages and regular wages at the same time. An employee’s regular wages or salary are tied to a specific payroll period, so they receive regular pay at consistent, predetermined times throughout the year. On the other hand, employers can pay out supplemental wages to their employees at any time, regardless of the pay period.
For example, an employee may receive a bi-weekly paycheck for regular wages, but their company may choose not to pay out their end-of-year bonus until three months into the new year due to financial restrictions.
Entitlement
Employees are entitled by law to regular wages. Conversely, supplemental pay is not always a statutory requirement depending on the country.
While an employer typically determines which types of supplemental pay to include in their employees’ compensation packages, supplemental pay regulations vary from country to country, and some types may or may not be required depending on local laws.
For example, severance pay is not required in the United States under the Fair Labor Standards Act (FLSA). Still, a U.S. employer may choose to include severance pay as part of their compensation offerings to assist with talent attraction.
However, Mexico labor laws state that Mexican employees are entitled to full severance whether they leave their jobs or are terminated. Employees in Mexico are also entitled to a seniority premium of 12 days’ salary for each year they worked at the company.
Taxation
Depending on the country, regular pay and supplemental pay are taxed differently. The rules for withholding taxes from supplemental wages depend on how much supplemental income an employee receives annually and whether or not the supplemental wages are combined with their regular pay.
For example, the U.S. Internal Revenue Service (IRS) defines two different tax brackets for supplemental pay: above US$1 million and below or equal to US$1 million for one calendar year.
How is supplemental pay taxed?
Supplemental pay is taxable income and subject to specific tax regulations, and employers must withhold the correct income tax amounts from their employees’ wages.
The rules and calculations for withholding taxes from supplemental pay are determined by the pay type and amount of supplemental income an employee receives in a year.
Supplemental wages can either be combined with an employee’s regular wages or identified separately—and then taxed accordingly. However, taxation regulations differ from country to country.
Employers hiring talent in the U.S. must withhold Social Security, Medicare contributions, and federal unemployment tax (FUTA) from supplemental pay. If an employee’s annual supplemental wages are $1 million or less, the employer withholds 22% of their supplemental wages. If the employee’s annual supplemental wages exceed $1 million, the employer withholds 37% of their supplemental wages.
Who reports supplemental pay?
Employers are responsible for accurately tracking and reporting their employees’ supplemental pay. Companies track each employee's annual supplemental income and decide whether to combine the supplemental wages with the base pay or distribute them separately.
A business risks severe fines and penalties if they do not correctly track and withhold supplemental pay for tax purposes. Employers must ensure they consider all exemptions and accurately withhold supplemental income taxes to comply with country-specific payroll compliance regulations.
Why is supplemental pay important?
While supplemental pay is not typically required as part of an employee’s regular income, it is still a crucial element in creating a global compensation strategy. Prospective talent looks for extra perks like supplemental pay when seeking a new job, so it helps companies gain a competitive edge in the hiring market.
Offering various forms of supplemental income also helps employers retain employees. Supplemental pay rewards employees for their achievements and work ethic and motivates employees without relying on their regular salary alone.
As a result, supplemental pay plays a critical role in improving employee engagement, productivity, and, ultimately business success.
Disclaimer: This information does not, and is not intended to, constitute legal or tax advice and is for general informational purposes only. You should contact your attorney or tax advisor to obtain legal and/or tax advice with respect to your particular situation. Only your individual attorney or tax advisor can provide assurances that this information—and your interpretation of it—is applicable or appropriate to your specific situation. All liability with respect to actions taken or not taken based on this information is hereby expressly disclaimed. All content is provided "as is" and Velocity Global makes no representations or warranties concerning this information.
