You have a couple of options when calculating tax on supplemental wages and it is the employers choice which one you use. Most employers choose the flat 25% method as it is the easiest to implement, however the IRS does offer the aggregate method as an option and it is more likely to get you to the withholding rate based on the employee's w-4 elections. Below is an excerpt from IRS Publication 15 which explains how the aggregate method works. I suggest you review the supplemental wage section of Publication 15 to get a btter understanding of your options withregard to taxation on supplemental wage payments.
- If the supplemental wages are paid concurrently with regular wages, add the supplemental wages to the concurrently paid regular wages. If there are no concurrently paid regular wages, add the supplemental wages to alternatively, either the regular wages paid or to be paid for the current payroll period or the regular wages paid for the preceding payroll period. Figure the income tax withholding as if the total of the regular wages and supplemental wages is a single payment. Subtract the tax withheld from the regular wages. Withhold the remaining tax from the supplemental wages. If there were other payments of supplemental wages paid during the payroll period made before the current payment of supplemental wages, aggregate all the payments of supplemental wages paid during the payroll period with the regular wages paid during the payroll period, calculate the tax on the total, subtract the tax already withheld from the regular wages and the previous supplemental wage payments, and withhold the remaining tax.