Supplemental withholding rate
Also: supplemental withholding rate, supplemental tax rate, supplemental rate
The flat federal rate employers use to withhold income tax on supplemental wages such as bonuses, RSU vests, and NSO exercises. 22% on the first $1 million of supplemental wages per calendar year, 37% above.
The supplemental withholding rate applies to wages paid separately from regular payroll. IRS Publication 15 fixes the rate at 22% for supplemental wages up to $1 million in a calendar year per employee and 37% for every dollar above $1 million. The $1 million threshold is measured by employer, so an employee working at two companies in the same year could see the 22% rate at each. Employers must withhold at 37% on excess; they cannot use the employee’s marginal rate.
Example: a director earns $1.4 million of RSU vests in a year at one employer. The first $1 million withholds at 22% ($220,000) and the last $400,000 withholds at 37% ($148,000), totaling $368,000 on the $1.4 million.
Common mistake: assuming 22% matches the filer’s actual marginal rate. Most senior tech employees sit in a 32% or 35% bracket, so the supplemental rate leaves a 10 to 13 point gap funded out of pocket at filing.
Supplemental withholding matters at every RSU vest, bonus, NSO exercise, and severance payment. Estimated tax planning starts with measuring the gap between the supplemental rate and the actual bracket.