IRS Lock-In Letters – What’s An Employer To Do?

Written By Steps To Faculty Published June 8th, 2010

Employers often ask employees to designate the amount of tax withholdings for paychecks. Occasionally, employees will fail to withhold a sufficient amount in the eyes of the IRS. The IRS will then send a “lock-in” letter on the amount to be withheld. What’s an employer to do?

Step 1: Withholdings

Four taxes must be withheld from employee paychecks – Medicare, Social Security, Federal Income and State Income tax. The Medicare tax is set at roughly 1.5 percent of salary while social security is set at 6.2 percent. The withholding for federal and state income tax, however, is subject to adjustments made by employees. The amount of tax required to be withheld by the IRS requires a calculation beyond the scope of this article, but you can look to the “Employer’s Tax Guide” on the IRS web site.

If an employee claims excessive deductions that result in insufficient withholdings, the IRS may respond. The typical response is to send an employer a “lock-in” letter.

The lock-in letter tells the employer to increase the amount of withholding tax of the employee. The IRS will actually specify the maximum number of withholding exemptions the employee can claim. The more exemptions claimed, the less tax withheld in each paycheck. The IRS will also send a copy of the correspondence to the employee.

As an employer, you must comply with the IRS lock-in letter. The IRS will designate a specific compliance date. Better to have died a small child than fail to comply with the letter. Failure to comply will result in the tax liability transferring from the employee to the employer. The employer can also expect the unwanted attention of IRS auditors. In short, make absolutely sure you comply with the lock-in letter.

What should you do if you receive a lock-in letter, but the employee no longer works for you? You must send a written response to the IRS office listed in the correspondence. The response must state the employee no longer works for you and the last date of employment to the best of your knowledge.

What should you do if the employee refuses to comply with the lock-in letter? You must comply with the lock-in letter. The employee’s wish is irrelevant and you have no discretion in the matter. Instead, the employee should be told to contact the IRS directly and request a modification to the lock-in letter.

Lock-in letters can cause stress in employee-employer relationships. Unfortunately, there isn’t much you can do about.


Roger Due

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