Payroll in Practice: 2.18.2025

Question: Wage underpayments, such as those caused by time sheet errors, can create financial hardships for employees. An employer is considering a policy of correcting wage underpayments with off-cycle payments at the time the error is discovered rather than waiting until the next regular payday. Are off-cycle wage corrections supplemental wages subject to 22% flat rate withholding?

Answer: How employers treat wage underpayments is an important policy consideration. Certainly, employee hardship is a factor, but employers must also consider the timely payment of wages. While federal labor law only requires “timely” payment of wages, most state wage and hour laws specify how soon employees must be paid after the work is performed. For example, New York’s Labor Law requires that manual workers “be paid weekly and not later than seven calendar days after the end of the week in which the wages are earned.”

Correction of a wage underpayment caused by a time-sheet error is a form of backpay, which is a supplemental wage payment.

The 22% flat rate withholding method is an optional method that employers may use to compute federal income tax withholding from supplemental wages. The method is not required and, in some cases, may not be allowed. Two requirements must be met before an employer may use the flat withholding method. First, the supplemental pay must be distinguished from regular wages by recording the two types of compensation separately in the employer’s records or by making separate payments. Second, the employer must have withheld income tax from the employee’s regular pay at some time during the current or immediately preceding calendar year.

Treasury regulations define supplemental and regular wages. Regular wages are amounts paid for the current payroll period at a regular hourly, daily, or similar periodic rate or at a predetermined fixed amount, such as a salary.

Supplemental wages are all wages that are not regular wages. Examples include payments made without regard to the employee’s payroll period, bonuses, back pay, severance pay, and commissions. Supplemental pay also includes expense reimbursements or allowances, nonqualified deferred compensation, noncash fringe benefits, and similar payments when they are included in wages.

This distinction is important for determining when mandatory flat rate withholding applies to a supplemental wage payment. This special rate applies to cumulative supplemental wages over $1 million paid to an employee during a calendar year. When this mandatory flat rate, currently 37%, applies to all or a portion of the supplemental wages, no other method may be used to compute withholding.

Withholding 22% of the gross supplemental payment without regard to an employee’s Form W-4, Employee’s Withholding Certificate, may result in a different amount of withholding than if the underpayment not occurred. This could be an issue if the employee’s marginal tax rate is significantly greater or less than 22%.

For wage underpayments, the aggregate method may be more appropriate. It is the default supplemental pay withholding method and may be used unless the mandatory flat rate applies to the wages. Under the aggregate method, the employer may calculate withholding for the supplemental pay by combining the supplemental pay with the regular pay for either the current or immediately preceding pay period to compute the amount to withhold from the supplemental payment.

For an off-cycle payment, it might be preferable to use the previous pay period for the aggregation, which should result in the same amount of withholding for the period as the amount that would have been withheld had the wages not been underpaid.

The withholding on the supplemental payment is computed by adding the taxable wages included on the supplemental check to the taxable wages reported on the original check for the previous pay period. The employee’s currently effective Form W-4 claims are used with either the percentage or wage-bracket method tax tables to determine the amount of income tax required to be withheld from the combined wages. The amount withheld from the supplemental check is then calculated by taking this total and subtracting the income tax that was previously withheld from the regular check.

Alternatively, the supplemental check may be aggregated with the regular pay for the current pay period when it is actually paid. If the amount of the regular check is known or can be reasonably estimated, the amount to withhold for the supplemental check can be calculated using the aggregate method as above.

However, when the regular check is issued, the total required withholding may have to be recalculated. The amount to withhold from the regular paycheck becomes the difference between the required withholding on the aggregate amount and the amount already withheld from the supplemental check.

If the employer is on a semiweekly deposit schedule for withholding tax, the withheld employee taxes and the employer’s share of FICA taxes must be deposited on time. The deposit due date is determined by the day the supplemental wages are paid to the employee rather than the due date for wages paid on the next regular payday. Failure to deposit the taxes on time could result in penalties. The due date for the deposit is the same regardless of which method or pay period is used to compute the amount to withhold.

This column does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., or its owners.

Author Information
Patrick Haggerty is the owner of a tax practice in Chapel Hill, North Carolina, and an enrolled agent licensed to practice before the Internal Revenue Service. The author may be contacted at phaggerty@prodigy.net.

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