Required Setup for Supplemental Earnings (U.S. only)

If you have employees that receive supplemental earnings, certain setups are required before you begin payroll processing to ensure that they are properly taxed.

Supplemental earnings are additional payments made to an employee on top of their regular earnings, such as bonuses, commissions, travel reimbursements, and so forth. These may be aggregated with regular earnings and taxed using the Federal tax routine or taxed using a flat rate defined by the IRS. If an employee's YTD supplemental earnings exceed the annual limit defined by the IRS, they must be taxed at the highest Federal bracket tax rate. Therefore, additional setup is required to specify the YTD supplemental wage threshold and tax rate.

The following discusses the setup required for supplemental earnings.

  1. In PR Earnings Codes, for each applicable earnings code, select the Supplemental Earnings checkbox.
    Applicable earnings are those requiring special Federal tax treatment (does not include overtime, double-time, or premium time).
  2. In PR Federal Info, use the YTD Supplemental Earnings Threshold field to enter the supplemental earnings threshold. Then use the Tax Rate field to enter the applicable tax rate. This rate may change from year to year and should match the rate set by the IRS for the highest wage bracket.
  3. If you pay bonuses in a Bonus pay sequence:
    1. In PR Deductions and Liabilities, for your Federal Tax deduction, select the Calculate as rate of gross on bonus sequence checkbox.
    2. In the Bonus Rate field, enter the appropriate rate (22% for 2025)
    The system uses this rate when an employee's YTD supplemental earnings posted to a bonus pay sequence are less than or equal to the YTD Supplemental Earnings Threshold.
    Note: If supplemental earnings are posted to a regular (non-bonus) pay sequence and do not exceed the YTD threshold, they will be aggregated with regular earnings posted in that sequence and Federal tax calculated using the Federal tax routine.
  4. In PR Pay Period Control, Payment Sequence tab, enter the Pay Seq number for supplemental earnings. If it is a bonus sequence, select the Bonus checkbox.
    Typically, a separate bonus pay sequence (for example, Pay Seq 1 for regular/salary earnings and Pay Seq 2 for supplemental earnings) is used to calculate tax on supplemental earnings at a flat rate of gross to avoid over-withholding tax.
During payroll processing, supplemental earnings (those flagged for Supplemental Earnings in PR Earnings Codes) are handled as follows:
  • Regardless of the Bonus sequence flag, if an employee's YTD supplemental earnings exceed the threshold, the system calculates tax on pay period earnings exceeding the threshold using the Tax Rate specified in PR Federal Info.
  • If the employee's YTD supplemental earnings do not exceed the threshold, Federal tax is calculated on a Bonus pay sequence using the deduction.
Note: If you did not select the Bonus checkbox for the pay sequence, supplemental earnings not flagged for Supplemental Earnings are taxed by the Federal tax routine. Taxes calculated using the Tax Rate in PR Federal Info are added to the tax generated by the Federal tax routine.