Do you own a small business? You should know how a supplemental payroll can impact your business. In this quick guide, our accountants will take you through the basics tips for creating a supplemental payroll. Let’s get started!
Creating A Supplemental Payroll
Supplemental payroll is known as irregular payments that are made to workers. It is a broad term covering all types of variables pay, from sales commissions to bonuses. Some businesses award supplemental pay to incentivize their employees to attain company objectives and, in some cases, work overtime. Irrespective of the reason forgiving a supplemental payment, they are subject to pay roll taxes. Below are examples of what supplemental pay might include:
- Severance Pay
- Overtime Pay
- Sales Commissions
- Retroactive Pay
- Nondeductible moving expenses
An employer can withhold income taxes for supplemental pay in many ways. Workers have two viable options to withhold income taxes for the supplemental payment. But none of the two options are perfect. One method results in employees withholding more than required. On the other hand, the second option leads to withholding two little. If you are fortunate, which is the right word for this scenario, the withholding will be perfect!
How Supplemental Payroll Works
Let us use an example of Tim to explain the two options available. Tim owns an art farming store. Assume Jude is the highest-performing worker in the company. Tim intends to start paying Jude sales commissions so that Jude maintains a prolific selling record. So, in the first 14 days of February, Jude sold so much to earn a $1000 commission. But Tim is unsure how to tax variable payments. Here is a little information about Jude: Tim pays Jude $1600 semi-monthly. Jude’s Federal Income Tax withholding form for 2021 explains that Jude is single, has a single job, has no dependents, and demands no additional withholding. So, how will Tim get Jude the extra pay? Let’s explore the two methods now!
Two Methods for Handling Supplemental Payroll Income Tax Withholding
- Flat-rate Method- This is still the easiest way to withhold any federal income taxes from the supplemental payments. If your business has a manual payroll, go with this option. Under this option, you have the liberty to withhold an actual rate from the IRS. This IRS supplemental tax rate is22% for every payment of a million dollars for the whole year. In Tim’s example, the supplemental withholding will now be $220 using this method.
- Aggregate Method- What could make a firm opt-in for this option? If they use payroll software! This method will allow you to withhold enough in the federal income taxes, enabling you to cover any supplemental payment.