0194 Publication 15 - irs-2025

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Supplemental wages refer to compensation paid in addition to an employees regular wages, such as bonuses, commissions, severance pay, overtime pay, and other non-regular earnings.
IRC section 15 provides rules for calculation of a taxpayers tax liability if a tax rate is changed during a taxpayers tax year, other than on the first day of that year. The section applies to repeals of tax but not to inflation adjustments.
Severance pay and unemployment compensation are taxable. Payments for any accumulated vacation or sick time also are taxable. You should ensure that enough taxes are withheld from these payments or make estimated tax payments to avoid a big bill at tax time.
By January 15 of the following year, the third party is required to furnish the employer statements showing for each person to whom sick pay was paid: the employees name; the social security number of the employee (if social security, Medicare, or income tax was withheld); the amount of sick pay paid to the employee;
Tax Implications in the U.S.: The severance payment would be considered additional income and would attract a flat 22% withholding rate for federal tax, along with any applicable state taxes (depending on the state). Social Security and Medicare taxes would also be applicable, subject to wage limits.
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Employers use Publication 15-T to figure the amount of federal income tax to withhold from their employees wages.
Is severance pay taxable? Yes, severance pay is taxable in the year that you receive it. Your employer will include this amount on your Form W-2 and will withhold appropriate federal and state taxes.
The supplemental tax rate may apply to extra money paid by your employer outside of your regular salary, like commissions, bonuses, and more. These types of wages are taxed at a different rate than standard incomeas much as 37%--so your employer may be required to withhold tax using a different method.

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