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what is supplemental income

These days it is very common for individuals to have regular income, as well as supplemental income. While regular income earned through an employer typically has taxes withheld, some supplemental income does not. If you earn supplemental income, it’s important to learn how it is taxed and when. Here is a brief overview of supplemental income tax.  

What Is Supplemental Income? 

Supplemental income is any money earned on top of your regular income. Even if you only work a regular 9 to 5 job, you may still earn supplemental income through any of the following sources: 

  • Bonuses 
  • Overtime pay 
  • Commissions 
  • Tips 
  • Prizes or awards 
  • Severance pay 
  • Back pay 
  • Payments for paid time off 
  • Taxable fringe benefits 

Some taxpayers do not have regular income through an employer. Some may earn supplemental income through contract work or through a business. Some examples of supplemental income for these groups are: 

  • Schedule E income  
  • Ridesharing service 
  • Sales made through an online shop 
  • Direct sales 

How Is Supplemental Income Taxed? 

How supplemental income is taxed depends on how the income is classified. Income reported on Schedule E will usually consist of estates, trust, real estate rental income, royalties, partnership and S corporation income, and residual interests in real estate mortgage investment conduits (REMICs). Many of these income sources are taxed differently. 

Estates and Trusts 

Beneficiaries pay tax on the income of the estate or trust they inherit at their regular income tax rates and at capital gains rates for any capital gains they receive. In addition, if the estate or trust does not distribute all the income to the beneficiaries it will pay tax on any undistributed income. 

Royalties 

If you are paid royalties for the use of any of your intangible assets, you will receive a Form 1099-MISC that tells you the amount of royalties to report on Schedule E. These royalties are taxed at your regular income tax rate. 

Business Income from Partnerships and S-Corps 

Taxes for S-Corps are passed through to shareholders, while taxes for partnerships are passed through to the partner’s personal income. The tax rate will depend on personal income rates.  

Real Estate Rental Income 

The tax rate for rental real estate varies from 10% to 37%, depending on your filing status and taxable income.  

Supplemental income for employees is based on personal income tax rates. However, the amount withheld will vary depending on whether your employer pays it out with your regular wages or separately. If it’s combined with your wages, the amount withheld will typically be like the way your wages are withheld. If they are paid out separately, employers can withhold at the IRS’s flat rate of 22%. If you are fortunate enough to earn $1 million in supplemental income, it will be taxed at 37%.  

Supplemental income earned through gig, contract, or freelance work should be reported on your individual tax return using Schedule C. If you receive any 1099 Forms, you should use these to calculate your total income through independent work.  

Tax Help for Supplemental Income Earners 

Tax policy can change every now and then. If you earn any type of supplemental income, you should stay up to date on all the most recent changes in taxation rules. For example, in 2024 the rules for reporting income earned through Form 1099 are changing drastically. Being unprepared for a change in policy could lead to all sorts of issues, from a large tax bill to an IRS audit. When in doubt, your best bet is to speak to a trusted tax professional to avoid a stressful tax issue. If you need tax help, Optima and our team of experts are here. Contact us for a free consultation.