Wednesday, December 23, 2015

2016 Supplemental Wage Tax Rates

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Employees are often paid special or irregular types of payments in addition to their regular wages, such as overtime pay, bonuses, and commissions. These payments are classified as "supplemental wages" and are often taxed at a flat rate for federal and state income tax withholding.

There is a two-tiered system for withholding federal income tax from supplemental wages at a flat rate:

  • Optional flat rate: 25% for supplemental wages up to and including $1 million. No other percentage is allowed.
  • Mandatory flat rate: 39.6% for supplemental wages over $1 million.

For more information, see IRS Notice 1036, revised December 2015, Early Release Copies of the 2016 Percentage Method Tables for Income Tax Withholding.

There are many states that allow flat rate withholding from supplemental wages that can be used. In 2016, there are changes for two states: North Carolina and Oklahoma:

  • North Carolina – Effective for wages paid on or after January 1, 2016, the flat rate increased to 5.85%, from 5.75%.
  • Oklahoma – Effective for wages paid on or after January 1, 2016, the flat rate decreased to 5%, from 5.25%. This is the highest withholding tax rate in Oklahoma.

Read PayState Update: Issue No. 24, Vol. 17 for more details on supplemental tax rates.

Update
Added to the list of states with changing rates:

  • North Dakota – Effective for wages paid on or after January 1, 2016, the flat rate decreased to 1.84% from 2.05%.