The definition of supplemental income is what you earn above and beyond your regular compensation. Most people understand the definition of regular income. It’s what you normally earn from your employer, and usually is just referred to as “income”. Supplemental income is a little more complicated and misunderstood. So what could be supplemental income?
WHAT IS SUPPLEMENTAL INCOME?
But what about supplemental income? Supplemental types of earnings are above and beyond what you typically earn, and are differentiated from regular earnings in that they are considered separate for tax purposes. Below is a list of some of the more common types of supplemental income:
- Overtime pay
- Severance pay
- Taxable fringe benefits — examples include unused vacation or sick days
- Retroactive pay
- Moving expense reimbursement
- Online side hustle
- Social Security benefits
This list of sources of supplemental income is by no means all-inclusive, but the idea is easy to understand. Because the two types of income are viewed as totally distinct from one another for tax purposes, it’s important that to understand what the difference means to your personal taxes as we enter into the new tax season.
HOW SUPPLEMENTAL INCOME IS PAID TO YOU
The first key difference to understand regarding regular and supplemental income is the time frame that the two are allowed to be paid out, according to the law. After you work and earn regular income, you are required to be compensated for this within a seven day window after the end of the pay period.
Conversely, supplemental income is not governed by the same time constraints. For example, a bonus that you earn for the last quarter the previous year may not be paid to you until February.
SOCIAL SECURITY INCOME
Then there is Supplemental Security Income, SSI, which is a government program that provides benefits (i.e., income payments) to disabled adults and children who meet low income thresholds. Social Security Income benefits also are payable to people 65 and older without disabilities who also meet the minimum thresholds.
WITHHOLDING SUPPLEMENTAL INCOME
A second primary factor that separates regular from supplemental income is the way that withholding is calculated. For regular income, the basis for withholding is usually your marital status and the number of allowances that you claim (think this form you complete when starting a new job).
Supplemental wages are a little trickier. There are three different acceptable options for withholding supplemental income taxes: the first is to add your entire wages together (regular and supplemental) and tax that entire amount. The second method allowed by the IRS is to tax the extra income at a flat 25% rate. Finally, a company can apply the relatively complex formula found here to tax your supplemental income and regular wages separately. Confirm with TurboTax or HRBlock.
One caveat: if you are lucky enough to earn over $1 million in extra income (hello, 1%!), that money must be taxed at the maximum allowed tax rate (currently 35%).
VACATION PAY AND TIPS
Your vacation pay and any tips earned are subject treated a little differently for tax purposes, depending on the situation.
Vacation pay is considered a supplemental form of income if the amount earned is greater than the regular income that you would have been paid during the time period in question.
If you are in a line of work where tips are involved, take note: tips are treated as supplemental income if you receive both wages and tips. In cases where your employer does not withhold tax from your regular earnings, the tips are added to the regular wages and that final amount is then taxed. However, if your employer does withhold tax on the regular hours that you work, tips are are subject to the 25% rate.
THE BONUS CONUNDRUM
Bonuses can be an exciting and fortunate extra boon to your pocket; however, some people experience a rude awakening when they see what a chunk that Uncle Sam has taken from that annual (or semi-annual, or quarterly) windfall.
If you end up with significantly less in bonus pay then expected, the culprit is most likely the withholding.
The reason is as follows:
Most employers choose to tax at the flat 25% rate if there is a separate check involved with your bonus. The reason is that it makes life easier on the accounting side for the company. In situations where your bonus money is lumped in with your regular paycheck, your tax liability will be higher since the amount being taxed is higher. To avoid a case of nasty bonus tax-shock, take a peek at this calculator, courtesy of TurboTax.
PAYING TAXES ON SUPPLEMENTAL INCOME
Also there are tax implications for different types of supplemental income. Check with your tax specialist or tax software to avoid concerns down the road.
Fortunately, (pun intended here at The Fortunate Investor), there are several benefits that are not taxed as supplemental income. The most common are usually moving expense reimbursements and other fringe benefits from your employer. These may include your company reimbursing you for business expenses. The expenses may include using your car for business or an on-site gym at the company location.
7 SUPPLEMENTAL INCOME JOBS TO HELP PAY THE BILLS
- Freelance. Become a freelance writer on Freelancer.
- Gig economy driver. Start as a Uber / Lyft driver.
- Online Surveys. Fill out online surveys such as Opinion Outpost or Pinecone.
- Vlog. Start a Vlog on Youtube to generate passive income and talk about something that interest you.
- Teach. Teach a class through a local college or Udemy online.
- Virtual Assistant. Become a virtual assistant / scheduler.
- Consulting. Start consulting on a topic you are an expert.
- Nanny/Babysit. This is straight forward you can be the neighborhood babysitter and start to make a lot of money in your free time.
- Share your expertise. Are you can expert? Find a hobby that you know about and can teach someone else. Offer instructions/lessons on guitar, working out, English, computer tech support, etc.
- Walk dogs. So there are apps that offer this service such as Wag. However, you can be the local dog walker and cut out the middleman for your neighbors and friends. Most pet owners are willing to spend as much on them as they would their own children.
- Website/Blogging. Have skills as a graphic designer, programmer, or web designer? Assisting with a web project is one of the easiest ways to make extra money online.
- Become a visiting professor. Trade schools, universities and local colleges offer classes in niche topics that you can use your expertise. You do not need to have a PHD but you should have some credibility to be a subject matter expert.
- Art. Have a crafty side? Consider opening a shop on Etsy or ArtFire. Put your crocheted blankets, homemade cards, and handcrafted jewelry on the market.
- House sit. Similar to dog walking or watching while people are on vacation you can watch their house while they are on vacation. This could be as simple as watering plants, getting the mail, taking out the recycling bin or other routine tasks that make it look like they are home.
- Rent A Room. If you have a house and it has some extra room you should consider renting out a room or multiple rooms. This is a real asset that you can convert into a great income generator.
TIPS FOR BUILDING SUPPLEMENT INCOME
Do you want to make more money or have your own business? This is a good time to start thinking of new investments, that could be investing in yourself such as education, a new business, the stock market, or other ways to increase your income.
First, you need to think about what your long term goal are and how you can achieve them. Start by thinking about your personal strengths and how you can add the most value. Ideally, this would be something that you are both good at and enjoy. Think of it as a job/hobby or a “jobby”. The point is that you enjoy doing it so much that it does not feel like work but fun.
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