Employers can choose between two methods of withholding federal taxes from bonus or supplemental income when it is given to the employee in a check or direct deposit separate from regular income.
It appears from your post that the employer chooses to use the flat rate. This is compliant with state rules as well.
If an employer makes supplemental payments to employees, they must withhold Minnesota income tax just as for regular wages. There are different ways to calculate that withholding, depending on when the employer makes the payments and how they list them on their payroll records.
If the employer makes supplemental payments at different times than regular wages or paychecks, they multiply the supplemental pay amount by 6.25 percent (.0625) to calculate how much Minnesota tax to withhold. Federal is same treatment and 25% is generally withheld.
If the employer lists the payments separately on payroll records – regardless of how they are listed on employee paychecks – the employer may use either the flat rate or go by the W4.
This is not the choice of the employee but is determined how the employer pays and accounts for the supplemental wages.
Your employer is not required to follow the W4 change for this supplemental payment. In addition to that, claiming 99 exemptions is also claiming tax exempt status which is not correct and invalidates the W4.
When an employee files their actual return, they will be refunded any tax that was withheld that is over the total liability after all income is added together, but, withholding rules are on the employer.