Lock-In Letter Procedures to Change in 2020 Due to Issuance of New Form W-4

During the December 5 IRS payroll industry telephone conference call, Walter Steele, Senior Analyst with the IRS Withholding Compliance Program, answered some questions that the IRS has received on lock-in letters as a result of changes to Form W-4 beginning in 2020.

Background. The IRS reviews W-2 information to determine whether there has been serious underwithholding. If so, the IRS may issue a lock-in letter (Letter 2800C) to an employer, specifying the withholding rate and maximum number of withholding allowances to use for the employee (see Payroll Guide ¶4010). The IRS will also send a letter to the employee (Letter 2801C or 2802C) which says it has determined that the employee’s withholding doesn’t comply with IRS guidelines. If the employee makes a correction now, the employee will avoid receiving a lock-in letter in the future that instructs the employer to increase the employee’s withholding rate [Reg. § 31.3402(f)(2)-1, Reg. § 31.3402(f)(2)-1(g)(2)].

Generally, employers are instructed within 60 days of receipt of a lock-in letter to begin withholding on the employee’s wages based on a filing status of single with zero withholding allowances. An employer may not decrease the withholding rate without IRS approval.

Changes beginning in 2020. Steele said that beginning Jan. 1, 2020, the default withholding rate on lock-in letters will be based on the 2020 Form W-4, which no longer will use withholding allowances. Employers will be instructed to withhold with a single filing status and at a higher tax rate which is calculated as if the employee had used the two jobs box in Step 2(c) of the 2020 Form W-4. This step should only generally be completed if a taxpayer and/or working spouse have only two jobs. The IRS recommends that Step 2(c) be used in withholding calculations for jobs with similar pay; otherwise, more tax than necessary may be withheld.

Modification letters. Steele said that employees may be given an opportunity to change the withholding required in the lock-in letter. If the IRS agrees with the changes, the employer will receive a modification letter indicating the rate adjustment. The modification letter is being revised to take into account the 2020 Form W-4. It will indicate a filing status (single, married, or head of household) and will specify a dollar value for withholding based on an employee’s particular situation. Modification letters go into effect immediately.

Steele also noted that the rules regarding reemployment will not change. Employers that rehire an employee within 12 months of the date of a lock-in letter must continue to use the rate in the letter.

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