Supplemental Pay: What It Is, How It Works, and Tax Implications for Hourly Teams

Supplemental pay is extra money you give your team on top of their regular wages. But why bother with supplemental wages?. After all, you already pay your team a salary.

But the benefits of supplemental pay are countless. Offering bonuses or commissions can help you stand out as an employer, especially when competition for talent is tough. 

Supplemental pay is also a great way to reward team members for putting in extra effort, whether they’re staying late, covering a holiday shift, or hitting performance goals. 

But before we dive into all the benefits, let’s learn what supplemental pay is, the different types you can offer, and how to make the most of it. You’ll also learn how this extra compensation can help you build a stronger, more engaged team.

{{banner-cta}}

What is supplemental pay?

Supplemental pay, also called supplemental wages, is any additional income given to your employees on top of their regular wages or salary. It’s a way for you to reward your teams beyond base pay, often for things like overtime work, bonuses, or special achievements.

For example, an employee might earn a commission on a sale, receive a holiday bonus, or get compensated for unused vacation time. Even severance pay, back pay, and retroactive pay fall under supplementary payments.

The key to understanding supplemental payment lies in the name: it’s designed to supplement an employee’s regular paycheck. Whether it's performance-based or situational, supplement payments serve as extra financial recognition for a teammate's time, effort, or achievements.

What qualifies as supplemental income?

Still scratching your head wondering what does supplemental income mean in the real world? We've got you covered. Here are some of the most common (and sometimes surprising) examples of what qualifies as supplemental payment:

Bonuses

Bonus pay is a classic supplemental income example. It rewards employees for meeting specific goals—think hitting sales targets or crushing quarterly objectives. 

Bonuses can be one-time or recurring, and they're often based on company profits or individual performance. Whether it’s a holiday bonus or a surprise end-of-year payout, it’s a sweet way to say, “You’re killing it.”

Commission

Commission is another supplemental payment favorite, especially in sales-heavy roles. It’s typically a percentage of the revenue or profit from deals closed by the employee. 

The more they sell, the more they earn—simple as that. It’s not just supplementary pay, it’s a powerful motivator.

Overtime pay

Working past 40 hours? Overtime pay is how you say thanks by giving your employees 1.5x their regular hourly rate. 

This form of supplemental compensation is usually reserved for hourly employees and is regulated by federal and state labor laws. So if you're clocking extra hours, you're also earning extra money.

Severance pay

When parting ways with a company, severance pay can offer a financial cushion. It’s typically based on an employee's salary, role, and how long they've been with your company. 

While it's not the most fun way to receive supplementary payments, it can soften the blow.

Retroactive pay

Sometimes, payroll doesn’t keep up and that’s where retroactive pay comes in. It’s a type of supplemental payment that covers underpaid wages from a previous pay period. 

Maybe a raise kicked in late, or an overtime shift wasn’t logged correctly. Retro pay sets the record (and your team's paychecks) straight.

Stock options or equity compensation

For some roles, supplemental benefits include more than just cash. Stock options or equity compensation give employees a chance to own a piece of the company pie. 

It’s a long-game reward that can really pay off if your company does well, and it definitely counts as supplemental income.

Relocation allowances

Moving for work? Some employers offer relocation allowances to cover expenses like moving vans, temporary housing, or even travel costs. 

It’s another example of how supplemental pay can help ease financial stress and show appreciation for major life changes.

Cashed-out PTO (Paid Time Off)

If you have employees who've built up a mountain of unused vacation days, consider letting them cash those out. 

This supplemental income can be paid out when they leave the company or in certain situations while they're still employed. It’s kind of like getting paid to not take a break—go figure.

What isn't considered supplemental pay?

Regular pay, the fixed hourly wage or salary employees earn for their standard workweek, is not considered supplemental pay.

Most benefits aren't considered to be supplemental pay either, because they don't directly increase an employee's paycheck. For example:

• Health insurance contributions
• Retirement savings contributions
• Non-monetary perks like company cars or gym memberships
  

Another thing to know is that reimbursements for expenses, like travel or office supplies, don't count as supplemental pay. These are just compensations for costs employees incur while performing their jobs, not extra income.

How is supplemental pay taxed?

Okay, your team is getting bonuses, commissions, or other forms of supplemental pay. But what about taxes? The way supplemental wages are taxed depends on how they’re paid out and whether they’re combined with regular wages or kept separate. 

Like with regular wages, you must withhold federal income tax from any supplemental wages, but the rules for withheld income tax changes depending on the type. Also, federal unemployment tax (FUTA) is also applicable depending on the type of supplemental pay you're giving out.

Generally, there are two main ways to tax supplemental pay: the percentage method and the aggregate method. Let’s break it down.

Percentage method

When supplemental income is paid separately from regular wages, say, a stand-alone bonus or a commission check, it’s often taxed using the percentage method. That means a flat tax rate is applied to the payment.

As of now, the Internal Revenue Service (IRS) recommends a flat supplemental tax rate of 22% for most (like bonuses or commissions). So if an employee gets a $1,000 bonus, $220 goes to taxes right off the top. Easy, predictable, and no surprise tax bills later.

Aggregate method

This one’s a little trickier. If you lump the supplemental pay in with an employee’s regular wages (as in, one big paycheck), your payroll system treats the total amount as taxable income—using the regular income tax tables.

This method could mean more taxes get withheld upfront, especially if that bigger paycheck bumps them into a higher tax bracket temporarily. It’s less straightforward than the percentage method and can sometimes leave employees wondering why their bonus felt smaller than expected.

Example calculation

Let’s say you give an employee a $2,000 year-end bonus.

• If you use the percentage method, 22% is withheld for federal taxes—so $440 goes to taxes, and they take home $1,560 (before any state/local taxes).
• If you use the aggregate method and include the bonus in their usual paycheck, the withholding is based on the total amount and could vary depending on their income bracket. They might see more taxes withheld, especially if they’re close to a higher tax threshold.

Both methods are legal, but one may feel “nicer” to your team. And since we all know supplemental tax rate vs regular tax rate is one of those confusing payroll mysteries, it’s always a good idea to explain how bonuses and other supplementary payments will be taxed before they hit that bank account.

What's the difference between supplemental and regular pay?

Think of regular pay as your reliable Monday-to-Friday BFF. It’s the consistent income employees count on—whether that’s an hourly wage or a set salary. It shows up like clockwork each payday and covers the standard hours your team works.

Supplemental pay, on the other hand, is more like a fun surprise guest at the party. It’s the supplemental payment that pops up in special situations like when someone crushes their sales goals, racks up overtime, or earns a one-time bonus. 

It’s extra, not expected. In short, regular pay is the bread and butter, while supplemental income is the avocado toast on the side.

Here’s how they really stack up:

• Definition: Regular pay is fixed compensation for standard work hours. Supplemental income is any extra cash added on top—like commissions, severance, or holiday bonuses.
• Examples: Regular pay = $20/hour or a $60,000/year salary. Supplemental pay examples = a $500 bonus, a 10% commission on a sale, or cashing out unused PTO.
• Tax treatment: Regular wages are taxed using standard income tax rates based on the employee’s total income. Supplemental wages can be taxed using a flat supplemental tax rate (typically 22%), especially if paid separately.
• Frequency: Regular pay comes like clockwork—weekly, biweekly, or monthly. Supplemental payments are occasional and based on performance, timing, or specific events.
  

And just to clear it up, the supplemental tax rate vs regular tax rate can be a head-scratcher for employees. So if your team gets a bonus that feels a little light after taxes, it’s usually because that 22% flat rate kicked in. 

Totally normal, but always good to give folks a heads-up.

Bottom line? Regular pay is the foundation of an employee’s income, while supplementary payments are the extra goodies that recognize effort, reward achievements, or make transitions (like layoffs) a bit smoother.

How to manage supplemental pay in your payroll system

So you've got team members earning supplemental income, and now you're wondering how to actually handle it in your payroll system and accurately track and report payroll taxes without pulling your hair out. 

Good news: It’s totally doable with the right approach, a little planning, and the right tools.

Choose the right tax withholding method.

First things first: You’ve got options when it comes to taxing supplemental wages. 

The two most common methods are the percentage method (usually a flat 22%) and the aggregate method (where supplemental pay is lumped in with regular wages and taxed as a whole).

If you’re cutting a separate check for a supplemental payment—say, a one-time bonus—the percentage method is your go-to. But if you’re paying it out with their regular wages? The IRS expects you to use the aggregate method. Choose the one that keeps your books clean and the IRS happy.

Track and document supplemental wages separately.

When reporting supplemental pay, whether it's retroactive pay, commission, or a relocation bonus, it’s a good idea to track all supplemental income examples separately from regular wages. 

Why? Because it helps with tax reporting, keeps your records clean, and makes it easier to explain things to employees when they ask, “Wait, why was I taxed more this month?”

Plus, having a clear breakdown of supplemental payment types makes end-of-year forms like W-2s a whole lot simpler.

Communicate with employees.

Nothing sparks confusion like a paycheck that looks a little different. If you’re issuing supplementary payments or bonuses, give your team a quick heads-up.

Let them know it’s taxed differently, when they can expect it, and how it’ll show up in their pay stub. That kind of transparency builds trust, shows you’ve got their back, and saves everyone a few frantic Slack messages.

Integrate with payroll software.

Here’s where things get really easy: modern payroll software can handle all this for you—especially if you're using a payroll software like Homebase. 

From calculating supplemental pay types to applying the right tax rate and generating clear reports, Homebase takes the guesswork out of managing supplemental wages.

Everything’s tracked, documented, and delivered to your team with minimal effort. It even integrates with time tracking and scheduling, so you can say goodbye to spreadsheets and hello to smooth, stress-free payroll runs.

Why is supplemental pay important for hourly teams?

Even small businesses can benefit from offering their team bonuses or commissions. Here are just a few reasons to consider offering your team supplemental income.

Boost employee morale and productivity.

Looking for a quick morale booster? Supplemental wages may be the pick-me-up your hourly team needs to boost productivity when times are tough. Offering bonuses, overtime pay, or commissions can give employees the little extra motivation they need during busy periods.. 

Hourly employees are especially faced with a lot more uncertainty when it comes to their schedules and earnings. Giving them the chance to earn additional income gives them a clear incentive to work harder.

Enhance employee retention and reduce turnover.

High turnover is expensive, especially when you're hiring hourly workers. Supplemental pay can help change that, reducing employee retention and turnover rates by giving them a clear reason to stick around. 

Supplemental pay shows your teammates their hard work is valued, making them more likely to stay. Whether it’s providing holiday pay or performance-based bonuses, this extra compensation encourages your team to stick together, so you don't have to deal with the headache (and costs) of constant hiring and training. 

Industries where supplemental pay is beneficial

If you run a business in the hospitality, retail, or healthcare industries, consider supplemental pay. When schedules can vary and shifts are often a little unpredictable, bonuses, shift differentials, and tips help attract and retain staff. 

For example, in the restaurant industry, tips can determine whether an employee makes their next rent payment. And in retail, seasonal bonuses may encourage teammates to stay through busy periods. When it comes to healthcare, offering overtime or holiday pay helps keep critical shifts covered, even when they are less appealing.

Streamline supplemental pay for hourly teams.

Supplemental pay might sound fancy, but really, it’s just a smart way to reward your team. From tax methods to payroll tips, you’ve got the tools to make sure your business stays compliant while keeping your workplace buzzing with good vibes. 

And the best part? You don’t have to figure it all out on your own. Tools like Homebase Payroll make it easy to track, calculate, and stay on the right side of the law—no spreadsheet juggling required.

Try Homebase for free today and make payday one less thing to stress about.

{{banner-cta}}