February 11, 2020 IRS issues guidance on compliance with lock-in letters for federal income tax withholding Due to the significant revamp of the Form W-4, Employee's Withholding Certificate, the IRS has published to its website frequently asked questions (FAQs) that provide updated guidance on how to comply with lock-in letters for federal income tax withholding. Employer obligations pursuant to a lock-in letter If the IRS determines that an employee's federal income tax withholding is insufficient, it will issue a lock-in letter to the employer that stipulates the withholding arrangement for the employee. The employer will also receive an employee copy that includes information the employee can provide to the IRS to change the withholding arrangement. Employers are required to furnish the employee copy to an active employee (but not if employment has terminated). If the employee is terminated at the time the lock-in letter is received, the employer must nonetheless implement the withholding arrangement in the lock-in letter if the employee returns to work within 12 months after its receipt. The employer must implement the withholding arrangement no sooner than 60 calendar days after the date of the lock-in letter, giving the employee time to communicate with the IRS. Once a lock-in rate is effective, an employer cannot decrease withholding unless approved by the IRS. (FAQ 1, Withholding Compliance Questions & Answers.) The same withholding tables are used for lock-in letters received before and after January 1, 2020 The same set of withholding tables are used for income tax withholding whether the lock-in letter was received before or after January 1, 2020. Accordingly, employers can use a single system based on the modified 2020 Form W-4. To do this, for 2020, input values to Step 4(a) and 4(b) as follows:
See Publication 15-T, Worksheet 1. Employer's Withholding Worksheet for Percentage Method Tables for Automated Payroll Systems for additional information. Additionally, the Income Tax Withholding Assistant for Employers is available to assist in the calculations. (FAQ 2, Withholding Compliance Questions & Answers.) What to do if an employee submits a revised Form W-4 after the employer implements the lock-in letter If the revised Form W-4 received from the employee results in more withholding than specified in the lock-in letter, employers must honor the Form W-4. If the revised Form W-4 results in less withholding, employers must withhold based on the lock-in letter. Employers are asked to encourage employees to contact the IRS to request a modification to the lock-in letter. If the employee's request is approved, the IRS will issue a modification letter to the employer with instructions to withhold at a specific rate. (FAQ 3, Withholding Compliance Questions & Answers.) Effective date of IRS modification letter (letter 2808C) If an employer receives a modification letter for an existing withholding arrangement, the modification is effective immediately (not 60 days later). (FAQ 4, Withholding Compliance Questions & Answers.) Employer consequences for failing to implement a lock-in letter If an employer fails to comply with the IRS lock-in letter instructions, it is liable for the payment of any federal income tax that should have been withheld but was not. (FAQ 5, Withholding Compliance Questions & Answers.) Special considerations for electronic Form W-4 systems The IRS cautions that if employees can change their Form W-4 using an electronic/online system, employers will need to block employees from decreasing their withholding if they are subject to a lock-in letter. (FAQ 6, Withholding Compliance Questions & Answers.) Employer requirements if employees furnish a substitute Form W-4 developed by the employee or an official IRS form that is clearly altered Employers must refuse to accept a substitute form developed by an employee. An employee submitting such a form will be treated as failing to furnish a Form W-4. Further, any alteration of a Form W-4 (e.g., crossed-out penalties of perjury statement above the signature) will also cause the Form W-4 to be invalid. If an employer receives an invalid Form W-4, the employee will also be treated as failing to furnish a Form W-4. In both cases, the employer must inform the employee that the Form W-4 is invalid and must request another Form W-4 from the employee. Until the employee furnishes a new Form W-4, the employer must withhold from the employee as from a single person with no adjustments to withholding. If, however, a prior Form W-4 is in effect for the employee, the employer must continue to withhold based on the prior Form W-4. (FAQ 7 and 8, Withholding Compliance Questions & Answers.) IRS will use alternative methods for monitoring employee withholding in the absence of employers routinely submitting copies of certain Forms W-4 The IRS will be making more effective use of information contained in its records, along with information reported on Form W-2 wage statements, to confirm that employees have enough federal income tax withheld. Individuals who have insufficient income tax withholding are subject to penalties. (FAQ 9, Withholding Compliance Questions & Answers.) ———————————————
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