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What Is the Meaning of Supplemental Pay, and How Can It Help?

Supplemental income is unexpected cash, but what should you do with this windfall?

Justin Cupler

Contributing Writer at Tally

June 3, 2022

This article is provided for informational purposes only and is not to be construed as legal or tax advice. Consult with a professional financial or tax advisor before making tax decisions.

When you receive a little larger paycheck than most, you may be confused why it’s so high. Did you get a raise? Is it an accounting error? This is often simply supplemental income your employer owed you and you were unaware of.

You may still wonder what supplemental income is and where it comes from. To help clarify it, we will outline the supplemental pay meaning, various types of supplemental income, how it’s taxed and what to do with the extra money.

Supplemental pay meaning

Supplemental pay is a relatively broad term, but it means any income that is above and beyond an employee’s regular wages. These supplemental wages can come from many sources and can be small or large.

Examples of supplemental wages

There is a wide range of supplemental pay out there. Some are small and given to you in increments, whereas others are large and given in one lump sum. Let’s look at some of the common supplemental income sources, according to the Internal Revenue Service (IRS).


Whether it’s a yearly, monthly, weekly or even daily bonus, this pay is above and beyond your normal pay. This qualifies it as a supplemental wage.


If you earn a salary or hourly wage plus commission, the IRS considers the commission you earn as supplemental pay.


Most waitstaff receive a small hourly wage, which is the employee’s regular wage. All tips earned above that are considered supplemental income. The same goes for delivery drivers, doormen and other positions that include tips.

Keep in mind that the IRS permits companies to treat tips as regular income.

Overtime pay

If you work in excess of 40 hours a week, you’re entitled to overtime pay. The IRS generally treats this as supplemental income, but the company you work for can also classify it as regular income if the overtime is consistent.

Accumulated sick leave

If you receive a payout for unused sick pay, the IRS considers it supplemental wages and taxes it as such.

Severance pay

If you receive payment when leaving a job — whether willingly or due to termination — and receive a lump-sum or periodic payment after leaving, this is severance pay. The IRS views severance pay as supplemental wages.

Awards and prizes

If you received anything of value from your company as an award or prize, the IRS views its value as supplemental income and taxes it as such.

Nondeductible moving expense reimbursement

Did your company pay you to relocate? If so, the IRS views this reimbursement as supplemental pay.

Back pay

If you received retroactive pay increases, overtime pay, pay for an hours-reporting error or any other late payment, this is back pay. Back pay is supplemental pay, according to the IRS.

Taxable fringe benefits

Suppose you receive any other taxable benefits of value, like a car, commuter stipend and others. In that case, the IRS treats the value of the cash and noncash fringe benefits as supplemental wage payments.


How does the IRS tax supplemental wages?

The IRS treats supplemental wages differently than an employee’s regular wage, so they are also taxed differently.

Supplemental pay over $1 million

If your supplemental pay exceeds $1 million in any calendar year, your employer should withhold 37% for income tax. They are not to consider any data from your W-4 document — the document you filled out for your employer that includes your marriage status, dependents and other variables that impact your taxes — as this 37% is a flat tax and a requirement.

Supplemental pay of $1 million or less

If you receive $1 million or less in supplemental income, your employer can either combine it with your normal wages or pay it separately, which impacts how the IRS views it.

Combined with regular wages

If your employer combines your supplemental wages with your regular income, which they can do with certain types of supplemental income, they must withhold taxes as they would a normal pay. This would be in accordance with your IRS form W-4.

Separate from regular wages

If your employer pays supplemental wages separate from your regular wages, there are two methods. Your employer will choose the proper method based on how it withholds taxes from your regular pay and when the supplemental pay was issued.

If your employer withheld income tax from your regular pay in the current or immediately preceding calendar year, there are two ways it can withhold taxes from your supplemental pay:

  1. Percentage method: The employer withholds a flat rate tax of 22% from the supplemental pay.

  2. Aggregate method: The employer adds the amount of supplemental wages to your current or upcoming regular pay. It can then withhold taxes from it as a single payment The tax rate will be based on your W-4 and annual income.

But what if your employer did not withhold income taxes from your regular wages during the current or preceding calendar year? In that case, the employer will calculate federal income tax withholding using the second method above.

How can your supplemental wages help you get out of debt?

After sorting out the tax situation surrounding your supplemental wages, you can decide what to do with the extra cash you earned. Sure, you can splurge and buy a big-ticket item, but what if you’re in debt?

If you have significant high-interest debt, such as credit card debt or personal loans, using this supplemental income to pay it down can reduce the time it takes to pay it off and the interest you pay.

For example, consider you have $5,000 in credit card debt on a card with 19.9% interest rate and a 3% minimum payment (or $150). Making just the minimum payment would take you 49 months to repay and cost you $2,338 in interest.

If you get a $2,000 bonus and apply that to the credit card and maintain the $150-per-month payment, you’ll pay off the card in 25 months and cut your interest charges to just $675.

You can take similar action with an ongoing supplemental wage, like overtime. However, you’ll simply add the post-tax overtime income to your monthly minimum payment to pay down your credit card debt. If you have multiple credit cards, you can use the debt avalanche or debt snowball to help organize your payoff order.

How to use supplemental pay if you don’t have debt

If you have no debt to pay off, then you’re ready to begin saving or investing your supplemental income. If you haven’t built a three- to six-month emergency fund, you can use your extra money to start.

If you already have an emergency fund, you may want to invest in your future by funneling this extra cash into an investment account, such as an IRA or brokerage account. Remember, with investing comes the risk of losing 100% of the cash you invested, so speak with a financial advisor before making any investment decisions. 

Supplemental pay is great for becoming debt-free

With a firm understanding of supplemental pay’s meaning and how it’s taxed, you can use this extra cash to pay down debt. Whether it’s a one-time lump-sum payment or an ongoing payment, this cash is above and beyond your normal income and is, therefore, free to apply to debt.

Need even more help paying down your debt? The Tally† credit card debt repayment app can help. Our app helps you manage your credit card payments, and Tally offers a lower-interest personal line of credit, allowing you to efficiently pay off higher-interest credit cards. 

To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 to $300.