Supplemental Tax Withholding
Definition
A flat withholding rate applied to supplemental income (bonuses, equity compensation, commissions). The federal supplemental rate is 22% for amounts under $1M and 37% for amounts over $1M in a calendar year. This flat rate often differs from your actual marginal tax rate, which can create a tax surprise (positive or negative) when you file your return.
Real-World Example
You vest $300K in RSUs, taxed at the 22% supplemental rate ($66K federal withholding). But your actual marginal federal rate is 35%, so you owe an additional $39K when you file. Alternatively, if you are in the 22% bracket, the withholding is exactly right.
Common Mistake
Assuming the withholding covers your full tax obligation. If your income puts you in the 32%, 35%, or 37% bracket, the default 22% supplemental withholding is significantly under-withholding. Set aside the difference or adjust your W-4 to increase withholding.
Why It Matters
Supplemental withholding creates a cash flow trap for high-income earners with significant equity. If you do not plan for the gap between withholding and actual tax liability, you may face a five-figure surprise at tax time.
Related Terms
Want to learn one equity concept per week?
Read the Newsletter