What Is Supplemental Income?

Whether it’s rental income from a property, a side hustle on the weekends, or a year-end bonus from your employer, this extra money is often referred to as supplemental income.

But what exactly does that mean, and how does it affect your taxes?  It might come as a surprise when you get your first post-bonus paycheck, but this income is subject to income and payroll tax withholding.

In this guide, we’ll break down the types of supplemental income and how they’re taxed, so you’re prepared when you file your return.

Key takeaways

• Supplemental income includes income that’s separate from your regular pay, like rental income, royalties, and bonuses.
• Not all supplemental income is taxed the same. For instance, partnership income is taxed at your personal tax rate, while bonuses are taxed based on how they’re paid out.
• The moving expense exemption has been discontinued by the OBBBA, but some fridge benefits are still excluded from supplemental income tax.
• Self-employed income isn’t considered “supplemental income” and is subject to self-employment taxes.

What is supplemental income?

Supplemental income includes earnings outside of your regular pay or salary that are reported separately from your main job. This may include:

• Royalties
• Rental income
• Trust and estate income
• Partnership and S-Corp income

Supplemental income for employees is referred to as supplemental wages.

If I work a side job, is that considered supplemental income?

No. Income earned from side jobs, whether that be rideshare, freelancing, or selling on Etsy, is considered self-employment income. Self-employment income is reported and taxed differently from supplemental income.

What’s considered supplemental wages?

For employees, the following may be considered supplemental wages:

• Bonuses
• Overtime
• Vacation pay
• Back pay
• Some fringe benefits

NOTE: There’s a new overtime pay deduction for tax years 2025 through 2028 2029. The One Big Beautiful Bill Act (OBBBA) passed July 4, 2025, establishing a qualified overtime income deduction that’s worth up to $12,500 per year.

How is supplemental income taxed?

If your employer combines the supplemental wages with your regular wages, your employer may withhold federal income tax as though the combined total were your regular pay for the period.

But if your employer pays you separately for the supplemental wages or separately states them on your pay stub, your employer may withhold income taxes on the supplemental wages at a flat 22% tax rate, no matter how many allowances you have claimed on the W-4 form you filed with your employer.

Regardless of the method your employer uses, when you file your tax return, the supplemental wages will be combined with your regular wages. Depending on your deductions, exemptions, and tax bracket, you may get some of the withholding back when you file your taxes. Although you may be taxed more heavily when your supplemental income is initially paid out, you may see a tax refund at tax time, which is good news.

Ready for more good news? There are a few payments that aren’t subject to income tax and payroll tax withholding.

Are any types of employee payments tax-free?

Here are two of the most common:

Fringe benefits

If your employer reimburses you for using your car for business purposes, provides a gym on the premises, or takes you and other employees on a golf outing, those “fringe benefits” are not supplemental wages and not subject to withholding.

But not all fringe benefits are non-taxable: If  your employer provides you with a vehicle for your unlimited use or pays for your membership at a health club or country club, you can expect to see the value of those fringe benefits included on your wage statement and income taxes withheld from your paycheck.

Moving expense reimbursements 

If you’re an active duty member of the U.S. Armed Forces or intelligence personnel, you may qualify for an exception and be able to exclude qualified moving expense reimbursements from your wages and not be subject to federal income taxes.

For all other individuals, employers must include moving expense reimbursements in your taxable income, according to the OBBBA.

Why is business income from S-Corps and partnerships supplemental income?

Income earned from S-Corps and partnerships is considered supplemental income because these business structures are pass-through entities, meaning income passes to the owners  for tax purposes instead of the organization being taxed.

How is S-Corp and partnership income taxed?

You will receive a form K-1 showing your share of the S-Corp and/or partnership income/expenses, deductions and credits which will be reported on Schedule E in your personal return. The net income becomes part of your total income to be taxed based on your personal income tax rate.

Why is estate and trust income taxed as supplemental income?

Like income from partnerships and S-Corps, income  passes  through estates and trusts to beneficiaries. As a beneficiary, you might have to pay taxes on supplemental income from these items owned by a trust or estate:

• Dividends and interest
• Royalties 
• Rental income from real estate properties 
• Business income (S-Corp and partnership income)
• Undistributed income from the estate or trust

However, distributions of original assets or inheritance are not taxable.

How is estate and trust income taxed?

You’ll receive Schedule K-1, which will provide a summary of your share of income, deductions, and credits. You’ll then take this information and include it on Schedule E.

This income is taxed the same as your ordinary income, unless capital gains taxes also apply to your situation.

What counts as rental income?

Rental income includes any income you earn from your rental real estate property, such as:

• Monthly rent
• Non-refundable security deposits
• Tenant-paid expenses
• Other fees

How is rental income taxed?

Like regular income, real estate rental income is subject to state and federal taxes and is taxed at your personal income tax rate, however, you may also be able to take advantage of certain write-offs to help you save, like the mortgage interest deduction. You’ll report all rental income and expenses on Schedule E.

What is considered royalty income?

Royalties include any payments you receive as the owner of intellectual property–for example, a song or book.

How is supplement income for royalties taxed?

For royalties, you’ll receive a 1099 form that outlines all of the royalty income paid out to you, as well as any taxes that have been withheld.

Royalty income is subject to both federal and state taxes and is taxed as ordinary income at your personal income tax rate.

All royalty income should be reported on Schedule E.

Tips for managing supplemental income

If you’re receiving supplemental income, here are some tips to help you prepare to file:

• Track your supplement income for the entire year
• Set aside money for your taxes so that you’re prepared in case you owe
• Make quarterly estimated tax payments (if taxes aren’t already withheld)

If you have a complicated tax situation, you may want to consider working with a tax professional to ensure you file everything correctly.
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