Question: An employee who’s in line for a quarterly bonus has presentedwith a form that requires us to treat the bonus as regular wages and withhold accordingly. It’s our policy to use the 25% flat withholding method on all supplemental pay. We’ve never seen a form like this before. Must we honor it?
Answer: No. The IRS gives employers discretion over the withholding method for supplemental pay; you don’t need employees to sign any written document to exercise that discretion.
On the other hand, you could, if you choose, let employees decide. If you decide to allow employees to choose, it would be prudent to explain the different withholding methods and tax consequences. You should probably get all of this in writing.