Lock In Letter Guidance Updated by IRS

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.

 

IRS Issues Proposed Regs for Withholding

The U.S. Department of the Treasury and the Internal Revenue Service have issued proposed regulations updating the federal income tax withholding rules to reflect changes made by the Tax Cuts and Jobs Act (TCJA) and other legislation.

In general, the proposed regulations, available now in the Federal Register, are designed to accommodate the redesigned Form W-4, Employee’s Withholding Certificate, to be used starting in 2020, and the related tables and computational procedures in Publication 15-T, Federal Income Tax Withholding Methods. The proposed regulations and related guidance do not require employees to furnish a new Form W-4 solely because of the redesign of the Form W-4.

Employees who have a Form W-4 on file with their employer from years prior to 2020 generally will continue to have their withholding determined based on that form.

To assist with computation of income tax withholding, the redesigned Form W-4 no longer uses an employee’s marital status and withholding allowances, which were tied to the value of the personal exemption. Due to TCJA changes, employees can no longer claim personal exemptions. Instead, income tax withholding using the redesigned Form W-4 will generally be based on the employee’s expected filing status and standard deduction for the year.

The Form W-4 is also redesigned to make it easier for employees with more than one job at the same time or married employees who file jointly with their working spouses to withhold the proper amount of tax.

In addition, employees can choose to have itemized deductions, the child tax credit, and other tax benefits reflected in their withholding for the year. As in the past, employees can choose to have an employer withhold a flat-dollar extra amount each pay period to cover, for example, income they receive from other sources that is not subject to withholding. Under the proposed regulations, employees now also have the option to request that employers withhold additional tax by reporting income from other sources not subject to withholding on the Form W-4.

The proposed regulations permit employees to use the new IRS Tax Withholding Estimator (discussed in our previous blog)  to help them accurately fill out Form W-4. As in the past, taxpayers may use the worksheets in the instructions to Form W-4 and in Publication 505, Tax Withholding and Estimated Tax, to assist them in filling out this form correctly.

The proposed regulations also address a variety of other income tax withholding issues. For example, the proposed regulations provide flexibility in how employees who fail to furnish Forms W-4 should be treated. Starting in 2020, employers must treat new employees who fail to furnish a properly completed Form W-4 as single and withhold using the standard deduction and no other adjustments. Before 2020, employers in this situation were required to withhold as if the employee was single and claiming zero allowances.

In addition, the proposed regulations provide rules on when employees must furnish a new Form W-4 for changed circumstances, update the regulations for the lock-in letter program, and eliminate the combined income tax and FICA (Social Security and Medicare) tax withholding tables.

Treasury and IRS welcome public comment on these proposed regulations. See the proposed regulations for details. Updates on TCJA implementation can be found on the Tax Reform page of IRS.gov.

Ring in the New Year with The Payroll Advisor

Each year payroll professionals attend year end webinars or live events to get the latest news on how to close out the old year and begin the new one.  This year I am offering something a little different than “year end”.   My next lecture will focus on just the new year.  So I am calling it “Ringing in the New Year–2020”.  In this 90-minute lecture I will cover all the latest for 2020.  This includes:

  • Completely new and revamped 2020 Form W-4
  • New DOL exempt rules
  • Minimum wage increases on the state level
  • New and upcoming sick leave and/or paid leave programs going into effect
  • 2020 Form W-2
  • 2020 Form 941
  • 2020 Form 1099-NEC

This different approach allows me to concentrate on the upcoming year and saves your time by not having to review information you may already know or will receive from other sources.

Our price for this information packed lecture is only $149. Click here to register.  Subscribers to Payroll 24/7 will receive a 20% discount if they register by Tuesday, December 3, 2019.  Not a subscriber to Payroll 24/7?  Try us out with your registration. If you register prior to Tuesday, December 3, 2019 you will receive a free 60-day subscription to this valuable payroll news service.

This lecture has been submitted to APA for 1.5 RCH credits.

Opinion Letters Issued

Despite all the “turmoil” that is going on over at the U.S. Department of Labor (DOL), the work is still continuing. The DOL has issued three new opinion letters that address compliance issues related to the Fair Labor Standards Act (FLSA) and the Family and Medical Leave Act (FMLA). An opinion letter is an official, written opinion by the Department’s Wage and Hour Division on how a particular law applies in specific circumstances presented by the individual or entity that requested the letter.

The latest opinion letters are:

  • FMLA2019-2-A: Addressing whether attending a Committee on Special Education meeting to discuss a child’s Individualized Education Program qualifies as FMLA leave;
  • FLSA2019-11: Addressing the application of the section 7(k) overtime exemption to public agency employees engaged in both fire protection and law enforcement activities; and
  • FLSA2019-12: Addressing the employment status of volunteer reserve deputies who perform paid extra duty work for third parties.

Be sure to keep up with the latest rule changes and opinion letters from the DOL with a subscription to Payroll 24/7.  Only $149 per year for all the latest payroll news right to your inbox.

IRS Launches New Tool for Estimating Taxes

The Internal Revenue Service has launched the new Tax Withholding Estimator, an expanded, mobile-friendly online tool designed to make it easier for everyone to have the right amount of tax withheld during the year. The Tax Withholding Estimator replaces the Withholding Calculator, which offered workers a convenient online method for checking their withholding. The new Tax Withholding Estimator offers workers, as well as retirees, self-employed individuals and other taxpayers, a more user-friendly step-by-step tool for effectively tailoring the amount of income tax they have withheld from wages and pension payments.

“The new estimator takes a new approach and makes it easier for taxpayers to review their withholding,” said IRS Commissioner Chuck Rettig. “This is part of an ongoing effort by the IRS to improve quality services as we continue to pursue modernization and enhancements of our taxpayer relationships.” The IRS took the feedback and concerns of taxpayers and tax professionals to develop the Tax Withholding Estimator, which offers a variety of new user-friendly features including:

  • Plain language throughout the tool to improve comprehension.
  • The ability to more effectively target at the time of filing either a tax due amount close to zero or a refund amount.
  • A new progress tracker to help users see how much more information they need to input.
  • The ability to move back and forth through the steps, correct previous entries and skip questions that don’t apply.
  • Enhanced tips and links to help the user quickly determine if they qualify for various tax credits and deductions.
  • Self-employment tax for a user who has self-employment income in addition to wages or pensions.
  • Automatic calculation of the taxable portion of any Social Security benefits.
  • A mobile-friendly design.

In addition, the new Tax Withholding Estimator makes it easier to enter wages and withholding for each job held by the taxpayer and their spouse, as well as separately entering pensions and other sources of income. At the end of the process, the tool makes specific withholding recommendations for each job and each spouse and clearly explains what the taxpayer should do next.

The new Tax Withholding Estimator will help anyone doing tax planning for the last few months of 2019. Like last year, the IRS urges everyone to do a Paycheck Checkup and review their withholding for 2019. This is especially important for anyone who faced an unexpected tax bill or a penalty when they filed this year. It’s also an important step for those who made withholding adjustments in 2018 or had a major life change.

Those most at risk of having too little tax withheld include those who itemized in the past but now take the increased standard deduction, as well as two-wage-earner households, employees with nonwage sources of income and those with complex tax situations.

 

Keep your knowledge current when it concerns payroll regulations with Payroll 24/7.  For only $149 per year, get all updates daily as they are issued right to your inbox.

The Social Security Wage Base Projections Are Here!

Every year we, in payroll, wait in anticipation for the social security (OASDI) wage base to be announced. This basically heralds in the year end/year beginning processing time.  But for some, maybe those responsible for employment tax budgets or financial reports, the wage bases for future years is a handy thing to have all at once and not just wait for it at the end of the year. For this reason, the Social Security Administration (SSA) publishes their estimates for the social security wage base each year.  The years 2020-2028 are included in this year’s 2019 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds.   The SSA provides three estimates, high, intermediate and low. For example, for 2019, the actual wage base is $132,900. However, the 2018 report projected $132,300 to $136,800.  The following chart lists the projections estimated by SSA (on page 115 of the report) for calendar years 2020 through 2028:

We still have to wait until October or so for the actual 2020 wage base, but the estimates can be useful in predicting future labor costs.

 

Reminder: Keep up with the payroll news by subscribing to Vicki’s e-news alerts, Payroll 24/7.  The latest payroll news when you need it, right to your inbox.

IRS Revises EIN Application Process…hoping to enhance security

The Internal Revenue Service (IRS) announced today that starting May 13th only individuals with tax identification numbers may request an Employer Identification Number, or EIN, as the “responsible party” on the application.  This change will prevent entities, such as employer, from using their own EINs to obtain additional EINs. The requirement will apply to both the paper Form SS-4, Application for Employer Identification Number, and the online EIN application.

Individuals named as responsible party must have either a Social Security Number (SSN) or an individual taxpayer identification number (ITIN). The IRS is making the announcement now to give entities and their representatives time to identify proper responsible officials and to comply with the new policy.

This change is part of the IRS’s ongoing security review. It provides greater security to the EIN process by requiring an actual individual to be the responsible party and improves transparency. If the employer needs to change the responsible party, it can complete the Form 8822-B, Change of Address or Responsible Party within 60 days of the change.

Entities such as federal, state, local or tribal governments are exempt from the responsible party requirement, as is the military including state national guard units.

 

Reminder: Keep up with the payroll news by subscribing to Vicki’s e-news alerts, Payroll 24/7.  The latest payroll news when you need it, right to your inbox.

 

 

With Higher Minimum Wages Can Come Higher Penalties

As my Payroll 24/7 subscribers found out today, Illinois is increasing its minimum wage to $15.00 per hour by the 2025.  But the bill, Senate Bill 1, also increases the penalties for failure to follow

the new requirements.  One of blogs that I follow, Wage & Hour Insights has an excellent post on this very issue.  I urge you to take a moment to read Bill Pokorny’s blog on the new Illinois minimum wage violations penalties, Stiff New Employer Penalties Included in Illinois $15 Minimum Wage Law. It is an excellent source on the new requirements.

Taxpayer Advocate Annual Report: Payroll is Upfront and Center in this Year’s Recommendations

The Taxpayer Advocate Service is an independent organization within the IRS.  Its purpose is to ensure that every taxpayer is treated fairly and to help taxpayers know and understand their rights.  The current Taxpayer Advocate is Nina Olson.  Each year the National Taxpayer Advocate (NTA) releases their Annual Report to Congress.  This report describes the challenges the IRS is facing. Federal law requires that the NTA’s annual report identify at least 20 of the most serious problems encountered by taxpayers and to make administrative and legislative recommendations to mitigate those problems. The following are the highlights of this year’s recommendations that affect payroll:

  1. Alternative to Form W-4: The report recommends scraping the Form W-4 altogether and analyzing the feasibility of adopting an IRS-determined withholding code. This approach is currently being utilized in the U.S. tax administration.  It also recommends that withholding be expanded at the source to encompass not only wages, but taxable interest, pensions, dividends, capital gains, IRS income, unemployment and even, potentially, certain earnings as an independent contractor.
  2. Furnishing Information Returns Electronically: Information return data to taxpayers should be furnished electronically for direct importation into tax return preparation software or to authorized tax return preparers.
  3. Lower Electronic Filing Thresholds: The report recommends requiring employers with more than five employees to file Forms W-2 electronically.
  4. Form 941 Filing: Recommends requiring Form 941 contain information about each employee’s name, address and social security number. To promote electronic filing, direct the IRS to use the fillable form currently on the IRS website and reformat so the form can be electronically filed, at no cost, directly from the website.
  5. Effects of the new tax law and the shutdown on overall IRS workloads: With all of the new tax forms needed to incorporate the changes to the tax code the IRS was overwhelmed. Add to this the shutdown and the antiquated systems (IRS has two of the oldest IT systems in the federal government) and you have a recipe for potential disaster. Because of these issues the IRS is now having to process more than five million pieces of mail and over 87,000 amended returns. All manually. IT modernization was the number one recommendation in this report.

Whether or not the recommendations are implemented is anybody’s guess.  But as the situation is becoming more intense at the IRS for meeting deadlines and handling the workload with antiquated systems it will be well remembered to monitor this report for any upcoming legislative changes.  Especially in the area of electronic filing, lowering thresholds and replacing the Form W-4.

Reminder: Keep up with the payroll news by subscribing to Vicki’s e-news alerts, Payroll 24/7.  The latest payroll news when you need it, right to your inbox.

CA Adopts ABC Test for Independent Contractors

On Monday, April 30, the California Supreme Court issued a landmark [Dynamex Operations West v. Superior Ct., Cal. Sup. Ct., Dkt. No. S222732, 4/30/18] decision basically stating that the “ABC Test” is to be used when determining whether a worker is an employee or independent contractor for purposes of California wage orders. Previous to this latest decision the court case of S.G. Borello & Sons, Inc. v. Department of Industrial Relations, Cal. Sup. Ct., 769 P.2d 399, 3/23/89) was used to determine employee status. In that case the principal test of an employment relationship was whether the person to whom services were rendered has the right to control the manner and means of accomplishing the result desired. Under Dynamex, the Court embraced a standard that presumes all workers are employees instead of contractors and places the burden on classifying an independent contractor under the ABC test.

For a detailed analysis of this case and how you might have to adjust your hiring decisions, I will refer you to the Labor & Employment Law Blog posted by Timothy Kim for the law firm of Sheppard Mullin.