How Do Supplemental Wages Factor Into Your Taxes?

Just over a decade since the 2008 recession, it seems like the economy has finally rebounded, with unemployment 4 percent. Despite good signs in the economy, however, many American workers are still struggling to get by. In the face of near-stagnant wages, almost 40% of Americans report that they've taken on a "side hustle" to bring in extra income.
Whether your supplemental wages come in the form of a side-gig, a freelancing enterprise, or even employee bonuses, they can be an important part of balancing your family budget. Unfortunately, they also have to be reported on your taxes. So how do these wages factor in at tax time? Let's take a closer look.

Also read: Minimum Wage To Increase This Year

Why Do I Need To Report Extra Income?

If you haven't been saving throughout the year, reporting your extra income at tax time can be a pain. Some workers are surprised to learn that they owe $1000s in taxes due to their supplemental wages. Given this stress, it can be tempting to fudge the numbers and leave your extra income off of your taxes. But there's a couple of reasons that's not a great idea.

Also read: What Are The Ways To Better Manage Payroll In Your Business?

Beware The Audit

Every year, the IRS randomly chooses a certain number of tax returns to audit for accuracy. While it is relatively rare to be chosen for an audit, the penalties if you are caught underreporting your income are not worth it.
First, you will have to pay any taxes that you would have owed based on your total income. But you will also have to pay a late fee, as well as interest accrued since the payment deadline. Although it is unlikely you would be charged with tax evasion, it is a possibility if the wages withheld are significant enough.

Also read: How to Review Your Paychecks Before Filing Income Taxes

Accurate Income

That said, fear of the feds is not the only reason you should avoid underreporting your income. In the end, it also helps you to have an accurate count. Let's say you go to buy a house. In most cases, the mortgage lender will ask to see three years of tax returns to verify your income.
If you do not include your supplemental wages on your taxes, they will not appear in your total income on your tax returns. This means that you will not qualify for as large of a loan if you go to purchase a house or a vehicle.

Also read: Income Tax Working In Another State

How Do I Report My Supplemental Wages?

Now that we've discussed why it's important to report supplemental wages, let's take a closer look at how to report them accurately.

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What Counts As Supplemental Wages?

Supplemental wages are any compensation that is not included in your salary or the hourly rate at your primary job. This includes bonuses, commissions, tips, severance pay, overtime pay, vacation pay, and back pay. It can also include wages that you bring in through side employment as an independent contractor.

Also read: A Guide to the Internal Revenue Code - Section 162(m)

How Are Supplemental Wages Taxed?

If you receive supplemental wages through your employer, your employer may choose to withhold taxes on them in one of two ways. First, they may add your supplemental wages to your total wages and withhold based on that number. Or, they may simply choose to withhold 22% of your supplemental wages.
However, if you bring in supplemental wages through side employment as an independent contractor, it is your responsibility to withhold the taxes yourself. You can then make the necessary tax payments either quarterly, or once at the end of the year.

What Happens When I File Taxes?

At tax time, your supplemental will be added into your gross income and taxed according to your marital status and tax bracket. This is true regardless of how your employer chose to withhold them. Depending on your filing status, this can be good news or bad news. For instance, if you are in a lower tax bracket, or are married, you may be entitled to have your supplemental wages taxed at a rate lower than 22%.
In this case, you might see a bigger return. In other cases, however, your supplemental wages might push you into a higher income bracket once they are added to your overall wages. If your employer did not withhold accordingly, then you may owe money based on this higher bracket.

What About Reporting Money From My Side Gig?

If you freelance to bring in extra money, you will have to report this amount as a business earning. Then, you will need to pay a self-employment tax on any money you made as a freelancer. This is because, when you work for an employer, they pay into social security on your behalf.
When you work as a freelancer, you are obligated to pay for your piece of the social security tax, as well as for the piece required by the employer. Once again, adding this money to your overall income may push you into a higher tax bracket, which can translate into higher wages. To account for this, make sure to put money aside throughout the year, or ask your employer to withhold more of your earnings.

Reporting Your Supplemental Wages Correctly

Remember, it's just as important to report your supplemental wages as your primary income at tax time. This not only prevents you from being dinged for back taxes but also ensures your income is reflected properly. Need help creating pay stubs to reflect your extra income? Check out our check stub maker today and get started!