RS Pub 15 (Circular E) instructs employers to withhold a flat 22% for federal income tax when supplemental wages like a bonus are paid separately from any regular wages. But what should you do if your employee asks you to withhold at a higher rate so that they won't be underwithheld?
The Aggregate Method
The IRS is very specific with this rule -- if the employer opts to use the flat withholding rate for supplemental wages, the only rate allowed is 22%. However, the employer could choose to use the aggregate method to determine withholding on a bonus. Under the aggregate method of withholding, the employer could combine the supplemental bonus with the employee's regular wage and withhold on the total as if it were a single payment for the regular pay period.
Using the aggregate withholding method still may not withhold as much as the employee needs to make sure the total annualized tax liability is met, so the employee may need to make an estimated tax payment or he/she may need to adjust Form W4 after the bonus is paid.