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The IRS's Letter to Companies on Overholding
The IRS submitted this issue that letter in 2012 saying how they wanted companies to do it. If you are setting that employee's rate arbitrarily without a calculated W4, that could be of risk because if you're not withholding according to the W4 and you do end up under withholding, you have set yourself up for some payroll exposure there. It's a bit of a fine line, either you withhold at the supplemental rates or the W4 rateIf you are trying to get cute and allow employees to say, pick a rate, that can get a little bit dicey too.