The redesigned IRS lock-in letters will take into account the elimination of withholding allowances for federal income tax determination purposes.
New tax laws can come with new processes for the employer and individual. In 2020, the impact of the Tax Cuts and Jobs Act of 2017 (TCJA) is still taking shape. The TCJA made sweeping changes that included eliminating withholding allowances (from 2020 through 2025) that were used on a Form W-4 (Employee’s Withholding Certificate) to help employers determine federal income tax withholding for employees.
As a result, the IRS redesigned Form W-4, which was issued for use beginning in 2020. This new Form W-4 no longer includes withholding allowances and contains a five-step process for individuals to complete (not all steps are required). Employers also use new Publication 15-T (Federal Income Tax Withholding Methods) to determine federal income tax withholding.
IRS lock-in letters
However, there are some situations where an employer is given specific instructions from the IRS on how to withhold federal income tax from an employee. An example of this may be if an employer receives an IRS Letter 2800C (Withholding Compliance Lock-In Letter to Employer) explaining that the IRS believes an employee filed an incorrect Form W-4. Typically, an employer should begin withholding federal income tax from the employee’s wages as specified on the letter. It generally takes effect 60 days from the letter’s date.
Prior to the TCJA, IRS lock-in letters instructed an employer to withhold federal income tax from the employee as if the employee has claimed a single filing status with zero withholding allowances. This status would withhold the most federal income tax from an employee’s wages.
However, since the TCJA has eliminated withholding allowances from 2020 through 2025, and employees can no longer claim these allowances on any completed 2020 or later Form W-4, the IRS needs to redesign its lock-in letters to reflect the changes.
On March 4, 2020, the IRS announced that it is in the process of redesigning the following two lock-in letters: 2800C and 2808C (Withholding Compliance Modified Lock-In Letter). Instead of providing employers with the number of allowances by which withholding would be reduced, the lock-in letters will provide employers with the withholding status, withholding rate and any annual reductions to withholding or additional amount to withhold per pay period as a dollar value.
Letter 2800C
The following format is what the withholding instructions will look like on the redesigned Letter 2800C:
Withholding Status (Filing Status): Single
Withholding rate: Form W-4, line 2(C), Checkbox (higher withholding rate)
Annual reductions from withholding (Form W-4 line 3): $0.00
Other income (Form W-4 line 4(a)): $0.00
Deductions (Form W-4 line 4 (b)): $0.00
Additional amount to withhold per paycheck (Form W-4 line 4(c)): $0.00
Note: Step 4 on the 2020 Form W-4 contains lines (a), (b) and (c), which have to do with other adjustments.
Letter 2808C
The following format is what the withholding instructions will look like on the redesigned Letter 2808C:
Withholding Status (Filing Status): Single (or Married or Head of Household)
Withholding rate: Standard withholding rate
Annual reductions from withholding (Form W-4 line 3): $0.00
Other income (Form W-4 line 4(a)): $0.00
Deductions (Form W-4 line 4 (b)): $0.00
Additional amount to withhold per paycheck (Form W-4 line 4(c)): $0.00
Note: Step 4 on the 2020 Form W-4 contains lines (a), (b) and (c), which have to do with other adjustments.
Employers using new 2020 withholding methods
Employers who have already converted their payroll systems to the new 2020 withholding methods can input values to Step 4(a) and 4(b) as follows:
4(a) – 12,900 for MFJ (married filing jointly) or 8,600 for all others; and 4(b) – Number of allowances, as specified in the letter, multiplied by 4,300.
Note: Step 4, line (a), has to do with other income (not from jobs).
No release date yet for redesigned lock-in letters
On the March 5, 2020 IRS payroll industry telephone conference call, a representative at the IRS said that there is no tentative release date for the redesigned lock-in Letters 2800C and 2808C.
