The new Form W-4 just keeps on providing more and more info for us payroll professionals. We now turn to handling lock-in letters. The IRS has updated its FAQs to explain how to handle the lock-in letters using the new 2020 Form W-4. As a quick review on the background of lock-in letters.
If the IRS determines that an employee does not have enough withholding, they will notify the employer to increase the amount of withholding tax by issuing a “lock-in” letter that specifies the withholding arrangement permitted for the employee. The employer will also receive a copy for the employee that identifies the withholding arrangement permitted and the process by which the employee can provide additional information to the IRS for purposes of determining the appropriate withholding arrangement. If the employee still works for for the employer, the employer must furnish the employee copy to the employee. If the employee NO LONGER WORKS for the employer, NO ACTION IS REQUIRED. However, if the employee should return to work within twelve (12) months, the employer should begin withholding income tax from the employee’s wages based on the withholding arrangement stated in this letter. The employee will be given a period of time before the lock-in rate is effective to submit for approval to the IRS a new Form W-4 and a statement supporting the claims made on the Form W-4 that would decrease federal income tax withholding. The employee must send the Form W-4 and statement directly to the IRS office designated on the lock-in letter. The employer must withhold tax in accordance with the lock-in letter as of the date specified in the lock-in letter, unless otherwise notified by the IRS. The employer will be required to take this action no sooner than 60 calendar days after the date of the lock-in letter. Once a lock-in rate is effective, an employer cannot decrease withholding unless approved by the IRS.
The new FAQs include:
- how to handle revised W-4s after the lock-in letter is received
- How to handle a modification letter
- Handling employee self service portals and lock-in letter
The site still includes info on how to handle lock-in letters using the 2019 and prior forms.