Tax year 2026 · Last updated June 9, 2026
IRS Publication 15-T defines a "supplemental wage" as compensation paid in addition to regular wages — most commonly bonuses, commissions, severance, accumulated leave payouts, and RSU vests. The federal withholding rule on supplemental wages is straightforward in shape: 22% flat, until you cross $1M in a year, then 37%. The threshold mechanics trip people up — especially anyone with multiple employers, mid-year job changes, or large vests near year-end.
The two rates
| YTD supplemental wages (per employer) | Federal withholding |
|---|---|
| First $1,000,000 | 22% |
| Every dollar above $1M | 37% |
These are flat withholding rates, not your tax rate.
The 37% mandatory rate matches the top federal bracket — coincidentally, since the rates were last updated in the 2017 Tax Cuts and Jobs Act.
The 22% rate is a one-size-fits-all default that under-withholds for anyone above the 22% bracket (which is most senior tech workers).
The threshold is per-employer, per-year
If you change jobs mid-year, both employers reset the $1M counter independently. 8M in supplemental wages — say, $900k from each of two employers — with $0 withheld at the 37% rate.
The IRS does not communicate YTD supplemental wage history between employers. 8M). The shortfall: ~$270k at filing.
This mid-year job-change trap is common for senior tech workers leaving one company for another with similar comp.
Every job change with $500k+ of supplemental wages already paid earlier in the year should prompt a quarterly estimated tax payment or a Form W-4 line 4(c) top-up at the new employer.
How a vest that crosses the threshold gets withheld
If your YTD supplemental wages going into a vest are $800k and the vest is $400k, the math:
| Slice of the vest | Rate | Withheld |
|---|---|---|
| First $200k (brings YTD to $1M) | 22% | $44,000 |
| Next $200k (above $1M) | 37% | $74,000 |
| Total on the $400k vest | 29.5% blended | $118,000 |
5% blended withholding is still well below the actual 37% marginal rate plus state and Medicare layers — so even crossing into the 37% mandatory rate does not eliminate the shortfall.
The all-in real marginal can hit 50%+ at the top.
Why 37% is still not enough at the very top
Once your total taxable income passes the top federal bracket threshold ($626,350 single, $751,600 MFJ in 2025; $640,600 single, $768,700 MFJ in 2026), every additional dollar of ordinary income is taxed at:
| Layer | Rate |
|---|---|
| Federal | 37% |
| Additional Medicare (§3101(b)(2)) | 0.9% |
| New York state | 10.9% |
| NYC local | 3.876% |
| True marginal | ~51.7% |
So the 37% supplemental withholding still leaves a ~14-point gap to the real marginal rate at the very top. Other high-tax states stack similarly: California up to 14.3% (with the mental-health surcharge), New Jersey ~13%, DC ~10.75%. Additional Medicare applies above $200k single / $250k joint.
Worked example — mid-year job change
You leave Employer A in June with $600k of YTD supplemental wages already paid (large pre-IPO RSU lockup vest in March).
You start at Employer B in July with a $300k signing bonus paid that month.
| Employer | Supplemental paid | Withheld |
|---|---|---|
| A (Jan–Jun) | $600,000 | $132,000 (22%) |
| B (Jul onward) | $300,000 | $66,000 (22%) |
| Combined | $900,000 | $198,000 (22% blended) |
At your real 37% marginal rate (total income is well above the ~$626k top-bracket threshold), the actual federal tax is $900,000 × 37% = $333,000 — a $135,000 shortfall at filing.
The IRS does not require either employer to track the other's supplemental wages.
The reconciliation happens entirely at your 1040 — and any underpayment triggers the IRC §6654 penalty unless you covered the gap via Form W-4 line 4(c) extra withholding or a quarterly estimated tax payment before December 31.
How to fix the under-withholding
- Top up W-4 line 4(c) — extra withholding per paycheck. The IRS treats it as paid evenly all year (§6654(g)(1)), so it retroactively cures the gap. The cleanest fix.
- Quarterly estimate at irs.gov/payments — counts only from the day you pay, so use it if you missed the W-4 window.
- Both, for a big shortfall (>$100k): W-4 top-up + a Q4 estimate.
Aggregate method as an alternative
| Method | What it withholds | Who uses it |
|---|---|---|
| Flat rate (default) | 22% (37% over $1M YTD) | Most companies — simpler |
| Aggregate | Your effective rate (~28–32% for high earners) | A minority |
When to talk to a CPA
- Switched jobs mid-year with $500k+ in bonuses/vests — the 22% counter resets per employer.
- Double-trigger vests at an IPO — years of income compress into one, often crossing $1M.
- First time crossing $1M YTD — withholding jumps 22% → 37%; plan the cash flow.
- Moved states mid-year — state sourcing stacks on the federal gap.
The takeaway
The 22%/37% supplemental withholding rule is a per-employer, per-year mechanic — not a true marginal-rate calculation. The 22% rate under-withholds for anyone above the 22% federal bracket.
The 37% rate at the very top still leaves a gap to actual marginal rate when state, Additional Medicare, and local taxes stack.
The single most expensive trap is the multi-employer mid-year switch where each employer's $1M threshold resets independently.
Cover the shortfall before December 31 via Form W-4 line 4(c) or a quarterly estimated payment to avoid IRC §6654 underpayment penalties.
Sources & citations
IRC §3402(g) (supplemental wage withholding rule); Treas. Reg. §31.3402(g)-1 (flat-rate method); Treas. Reg. §31.3402(g)-1(a)(2) (aggregate method); Treas. Reg. §31.3402(g)-1(b) ($1M threshold mechanics); IRC §6654 (underpayment-of-estimated-tax penalty); IRC §6654(g)(1) (withholding deemed paid evenly across the year); IRC §3101(b)(2) (Additional Medicare Tax 0.9%); IRS Publication 15-T (Federal Income Tax Withholding Methods, 2026); IRS Form W-4 instructions.
Run your own numbers
By Mathstub Editorial · Reviewed by Reviewed against IRS primary sources
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