Several of the alternative tax calculation methods just
described are used because the amount withheld from employee pay for the
year-to-date is higher than will be needed by the end of the calendar year. This
may be caused by a large payment to an employee earlier in the year, perhaps a
commission or bonus; when this happens, the extra payment is typically lumped
into the person's regular pay, which bumps the person into a higher tax bracket
on the assumption that he or she always receives this amount of money during
every pay period. As a result, there will be an excessively large withholding at
the end of the year, and the employee will receive a tax refund.
One approach for avoiding the excessive amount of tax
withholdings is to separate the supplemental pay from the base pay and issue two
separate payments to an employee. Under this approach, the percentage withheld
will likely be smaller than if the pay had been combined into a single paycheck.
Another approach that is acceptable to the IRS is to combine the payments and
then withhold a flat 27 percent rate from it. For most computerized payroll
systems, it is easier to implement the first approach.