Wow, that is weird. I wonder if someone didn't understand what the phrase "Exempt employee" means? Instead of treating him as Salary, they treated him as income tax free? You are going to need to contact the employer's payroll people, if you want something to cite for reference. I sure can't find anything, and I'm pretty good at this type of research, and I taught Payroll for years.

And, of course, MT will want to tax all of it.