Well, in the olde tymes, the crappers inside castles sometimes had plumbing that sent the stuff into the moat. Moats were very nasty back then.
Everyone else had a bucket, and apperently would just toss the stuff out the upper story windows. Makes sense for Human towns, I guess. Even today you can go to villages in places like Iraq with open sewers, where it all goes into a central pond, and is burned with gasoline at frequent intervals.
Open sewers are not as smelly as you'd think... the sewage is grey from people burning the stuff, and it doesn't really smell like anything unless they are actively burning it, which makes a spicy-meat smell oddly enough.
Sewage could be easily done in DF, so long as the output from Dwarfs was reasonable. Filling up a 20x10 cistern under the communal shitters in a year would be horrible, even if I could throw things in there... Or just make buckets that could be emptyed out into a Pit/Pond designated as Sewage.
Romans had sewers, and Dwarves are easily as sophisicated as they are, so flowing water from a brook that ran underground would be a nice solution.
Also, I dunno if it should just require a bucket, or there should be some peice of furniture like a john that dwarves could encrust with gems and mencing spikes. An Artifact toliet in the noble's room... I am not sure I'd like that.