IRS issues new guidance on lock-in letters for employers

These are some tricky times when it comes to withholding, thanks to the new tables and new W-4. This is likely why the IRS issued new guidance on how your team should handle lock-in letters.

The letters spell out the withholding arrangement that IRS selected to correct an under-withholding issue for a specific employee.

The Q&A-style guidance walks you through everything from how to handle it with your software to substitute W-4s.

Here’s a rundown of what the taxman expects of you. Be sure to pass this along to your payroll team to keep your company’s compliance high.

Employers’ obligations

Along with the lock-in letter, employers will receive an employee copy, which contains instructions about what the person can do to alter the arrangement.

Typically, the worker has 60 days to respond to the IRS before you must start withholding at the lock-in rate. Employees should submit a new Form W-4 and a statement supporting any claims that would decrease their tax liability directly to the IRS.

Once the rate specified in the lock-in letter is effective, no reductions can be made to a worker’s withholding unless approved by the IRS.

Of course, an employee may decide to hand you a new Form W-4 after you start withholding at the rate specified in the lock-in letter.

If the new form results in more withholding than lock-in letters specify, you have to honor the submitted W-4 and withhold at a higher rate.

However, if withholding is lower, tell the employee to contact IRS ASAP to request a modification of the lock-in rate, and continue to withhold at the lock-in rate until you hear from the Service.

You’re on the hook

And employers that don’t follow the IRS’ instructions and withhold at the lock-in rate will be liable for paying the additional taxes themselves.

Note: Even with all the changes to withholding in the new W-4, the Service said employers shouldn’t need two separate systems for lock-in rates from 2019 and earlier and for 2020 and beyond.

Employers can either apply the appropriate withholding tables separately to older lock-in letters and new ones or use one system for withholding based on the new W-4.

In this case, you can choose to enter zero for fields you can’t complete or just leave them blank.

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