5.4 Relocation, Awards, Bonuses, and Nonregular Pay
Key Takeaways
- Publication 15 treats bonuses, commissions, severance, back pay, accumulated sick leave, awards, prizes, retroactive pay, and taxable fringes as supplemental wages unless handled under a specific rule.
- Separate supplemental wages may use the optional flat 22% federal income tax withholding method only when the Publication 15 conditions are met; amounts above $1 million require the highest-rate withholding on the excess.
- Most moving expense reimbursements are taxable wages after the exclusion was eliminated except for qualifying active-duty Armed Forces permanent-change-of-station moves.
- Qualified achievement-award exclusions are narrow: tangible personal property for length-of-service or safety, meaningful presentation, no disguised wages, and dollar limits.
Nonregular Pay Still Starts As Wages
Relocation payments, awards, bonuses, commissions, prizes, severance, back pay, retroactive increases, and accumulated sick leave are tested together because they share a payroll problem: they do not look like ordinary hourly or salary wages, but they often are wages.
Publication 15 defines supplemental wages as wage payments that are not regular wages and lists examples including bonuses, commissions, overtime pay, payments for accumulated sick leave, severance pay, awards, prizes, back pay, reported tips, retroactive pay increases, payments for nondeductible moving expenses, taxable fringe benefits, and expense allowances under a nonaccountable plan.
For FPC candidates, the label is less important than the payroll result. A payment called "relocation assistance" may be taxable wages. A "thank-you award" may be taxable wages. A "retention bonus" may be taxable wages and may also affect the regular rate for overtime if it is nondiscretionary. A "severance payment" may be outside hours worked but still subject to Social Security, Medicare, federal income tax withholding, and FUTA. Payroll must decide wage inclusion, supplemental withholding method, employment tax treatment, gross-up if promised, reporting, and reconciliation to authorizations.
Supplemental-Wage Withholding
| Fact pattern | Federal income tax withholding approach | Trap |
|---|---|---|
| Supplemental pay combined with regular wages and not separately stated | Withhold as one regular payroll payment. | Applying the flat rate when the amount is not identified separately. |
| Supplemental pay separately stated and regular income tax was withheld in current or prior year | Optional flat 22% method or aggregate method may be available. | Thinking 22% is mandatory or can be changed to any rate. |
| Supplemental pay separately stated and no regular income tax was withheld in current or prior year | Use the aggregate method described in Publication 15. | Using the flat rate without meeting the condition. |
| Supplemental wages exceed $1 million for the employee during the year | Withhold at 37% on the excess, without regard to Form W-4. | Applying the employee's Form W-4 to the excess. |
| Supplemental wages subject to employment taxes | Apply Social Security, Medicare, and FUTA as applicable. | Treating the federal income tax method as the whole tax answer. |
The optional flat rate is not a bonus tax. It is a federal income tax withholding method. Supplemental wages are still wages for Form W-2 purposes and generally flow through Social Security, Medicare, and FUTA unless a specific exception applies. If an employee receives a $2,000 separately stated bonus and the employer withheld federal income tax from regular wages during the year, payroll may withhold federal income tax at the flat 22% method, then still calculate FICA and applicable employer taxes. If the employer promised a $2,000 net bonus, payroll must gross up the payment rather than simply pay $2,000 and ignore taxes.
Bonuses, Retro Pay, And The Regular Rate
Bonuses create two exam tracks. The withholding track asks whether the payment is supplemental wages. The wage-hour track asks whether a nonexempt employee's bonus must be included in the regular rate for overtime. Discretionary bonuses are generally excluded from the regular rate when the employer retains discretion over both the fact and amount of payment until near the end. Nondiscretionary bonuses, such as production, attendance, retention, promised sign-on, or KPI bonuses, usually must be allocated to the earning period and included in the regular-rate calculation.
Example: a nonexempt employee earns a $300 monthly production bonus after overtime weeks. Payroll cannot fix the issue by withholding at 22% and stopping there. It must also decide whether the bonus belongs in the regular rate for the covered weeks and pay any additional overtime premium due. The tax calculation and overtime calculation are separate compliance tests.
Relocation And Accountable Plans
Publication 15-B for 2026 states that the exclusion for qualified moving expense reimbursements has been permanently eliminated, except for a member of the U.S. Armed Forces on active duty who moves because of a permanent change of station due to a military order. For regular civilian employees, moving reimbursements are usually taxable wages. Publication 15 also identifies payments for nondeductible moving expenses as supplemental wages.
Do not confuse moving payments with ordinary business-expense reimbursements. Under an accountable plan, a reimbursement can be excluded from wages when it has a business connection, the employee substantiates the expense within a reasonable period, and the employee returns excess advances. A nonaccountable plan or unsubstantiated allowance is wages.
If an employee receives a $3,000 relocation allowance with no substantiation requirement, payroll should treat it as taxable supplemental wages. If the employee submits substantiated receipts for a business trip under an accountable travel policy, that is a different analysis and usually not wages.
Awards, Prizes, And Recognition
Awards and prizes are another source of over-exclusion. Cash, checks, general-purpose gift cards, debit cards, and cash-equivalent prizes are taxable wages. Publication 15-B allows a limited exclusion for certain employee achievement awards of tangible personal property given for length of service or safety achievement, as part of a meaningful presentation, under circumstances that do not create disguised pay. The exclusion does not apply to cash, cash equivalents, gift cards, gift coupons, gift certificates, vacations, meals, lodging, tickets, securities, or similar items.
The dollar limits also matter. Publication 15-B lists an excludable annual amount of $1,600 for qualified plan awards and $400 for awards that are not qualified plan awards, tied to the employer's deduction limits. Amounts above the allowable exclusion become wages. A watch presented at a formal 20-year service ceremony may qualify up to the limit if the plan rules fit. A $500 retailer gift card for "excellent service" is taxable wages, not an achievement-award exclusion.
Severance, Back Pay, And Corrections
DOL says the FLSA does not require severance pay, but Publication 15 says severance payments are wages subject to Social Security, Medicare, federal income tax withholding, and FUTA. That distinction is exam gold: federal wage-hour law may not require the payment, but once the employer pays severance under an agreement or policy, payroll treats it as taxable compensation. Back pay and retroactive increases also require corrected tax and wage reporting and may require overtime recalculation for nonexempt employees.
A separately stated $5,000 bonus is paid to an employee whose regular wages had federal income tax withheld earlier in the year. What does Publication 15 generally allow for federal income tax withholding?
A civilian employee receives a $4,000 moving allowance with no substantiation requirement. What is the best FPC treatment?
Which recognition item is most likely to be excluded under the qualified achievement-award rules, assuming the dollar limit and plan requirements are met?