Increase In Withholding Taxes on "Supplemental Wages" Over $1 Million

On July 24, 2006, the Internal Revenue Service (IRS) issued final rules  reflecting the changes made by the American Jobs Creation Act of 2004 ("Jobs Act").  The Jobs Act increases the wage withholding rate from the third-lowest tax rate for single filers (25% in 2006) to the maximum tax rate in effect (35% in 2006) once an employee's supplemental wages exceed $1 million for a calendar year.

Supplemental wages include bonuses, nonstatutory stock options, restricted stock, severance, deferred compensation, and other types of payments that are not regular base salary or hourly wages.

The final rules, which are effective for wages paid on or after January 1, 2007, should prove helpful to all employers, not just those that have employees with supplemental wages that exceed $1 million, as they (1) provide detailed guidance as to how employers should classify particular wage payments as regular wages or supplemental wages and (2) outline the procedures for withholding on supplemental wages both below and in excess of $1 million.  Go here to learn more about the final rules.

For more information, please contact your Ice Miller benefits attorney, Jim Kemper, or Cynthia Purvis.