I have viewed Publication 15 Circular E from the IRS website for Supplemental wages identified separately from regular wages. Although the publication can leave room for interpretation on the withholding for supplemental wages it does specify 25% for anyone currently withholding and a formula (1b) for anyone that has not been withholding in the current or immediately preceding calendar year – which is not the case, most of our employees are changing their W4’s to exempt for a payout (profit share/bonus). Can you give further clarification on this?

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I have viewed Publication 15 Circular E from the IRS website for Supplemental wages identified separately from regular wages. Although the publication can leave room for interpretation on the withholding for supplemental wages it does specify 25% for anyone currently withholding and a formula (1b) for anyone that has not been withholding in the current or immediately preceding calendar year – which is not the case, most of our employees are changing their W4’s to exempt for a payout (profit share/bonus). Can you give further clarification on this?

Thanks for reaching out on this. The IRS has said in their webinars that they prefer Employers use the 25% method. They have instructed that we have a written policy acknowledged by
all employees to combat complaints. When we have no policy, allowing employees to change the W-4 each time is the safest way to go.

However, in an audit we will face increased scrutiny
for not choosing a method, writing a policy and following through.

The IRS truly prefers 25%.

September 2017