What Are the Types of Supplemental Income?
Supplemental income is any income you earn in addition to your regular income from a full-time job. For example, if you work 40 hours a week as a plant supervisor, you could earn supplemental income by working overtime, receiving a bonus from your employer, or making money from a separate side gig. Unused vacation time, tips, and severance pay are also considered supplemental income.
Schedule E Supplemental Income
Business owners may need to file a form called Schedule E, along with their federal tax return, if they receive income from partnerships, rental properties, royalties, trusts, and estates.
Taxpayers receiving income from S corporations will also need to file a Schedule E. S corporations are enterprises that choose to pass corporate deductions, credits, losses, and income to shareholders for tax purposes. It is a legal method for corporations to utilize to avoid being double taxed on corporate income.
Employee Supplemental Income
The IRS defines employee supplemental income as wage payments that are not part of an employee’s regular paycheck.
Examples of employee supplement income types include:
- Back pay
- Commissions
- Holiday or work bonuses
- Overtime
- Severance pay
- Tips
- Unused paid time off (PTO)
- Work-related expense reimbursements
Independent Contractor/Side Jobs Supplemental Income
An independent contractor is someone whose work hours and work output are not controlled by a company or single employer.
If you don’t know if you are an independent contractor, the IRS lists three categorical rules that define independent contractors:
- Finances: Does a “payer” control how the person is paid, provide supplies to perform tasks, or reimburse the person for certain expenses?
- Employer/Employee Affiliation: Does the payer offer vacation pay, pension plans, or health insurance? Is the work done for the payer by the payee vital to the continued operation of the payer’s business?
- Management: Can the company control what kind of work and how much work the payee performs? Can the payee be fired for not performing tasks according to the payer’s instructions?
If you answered “no” to all three questions, then you are likely considered an independent contractor by the IRS.
What Is the IRS Supplemental Income Tax Rate?
Tax guidelines regarding how much a payee should withhold from supplemental income are complicated, especially for employees earning less than $1 million per year in supplemental income. View IRS Publication 15-A at https://irs.gov/publications/p15a for more information. This is the employer’s supplemental tax guide.
Supplemental income can be taxed at a rate of 22% (through 2025), or the payer can add supplemental income to the payee’s regular wages. For example, some companies pay out unused vacation time at the end of the year. Employees with unused vacation time will have this amount included in the final paycheck of a given year.
Exceptions to the flat tax rate of 22% include:
- If the payer withholds taxes from a payee’s wages but the payer doesn’t specify supplemental payments
- If the payer does not withhold taxes from the payee’s regular wages
If you earned more than $1 million in supplemental wages in 2022, your employer is mandated by the IRS to withhold income tax at a rate of 37%.
What IRS Tax Relief Programs Help People With Supplemental Income Tax Debt?
As part of the IRS taxpayer relief initiative, taxpayers can get help with paying past due taxes, including supplemental income tax debt.
Tax debt relief options offered by the IRS include:
- Payment Extension: In most cases, the IRS gives you 120 days to pay a tax debt in full. If qualify for an IRS short-term payment plan, however, you may have up to 180 days to pay the tax debt in full instead of the standard 120.
- Payment Plan: When you can pay your full taxes but need more time to pay, the IRS offers both short-term payment plans and long-term installment agreements depending on how much you owe and your current financial situation.
- Offer in Compromise (OIC): If you are approved for an OIC, the IRS will reduce your tax debt amount based on your ability to pay. You’ll then make monthly payments until you pay off the new amount in full.
- Collection Delay or Currently Non Collectible: In cases of severe financial hardship, you may ask the IRS to delay collection. Note that this will be a temporary delay, and you’ll still accrue interest on what you owe.
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