Opening mail from the IRS is rarely the highlight of anyone’s day.
But if your company receives an IRS Lock-In Letter regarding one of your employees, don’t panic—and definitely don’t ignore it.
A Lock-In Letter is an official notice from the IRS directing an employer to calculate an employee’s federal income tax withholding using specific instructions provided by the IRS instead of allowing the employee to determine their withholding solely through Form W-4.
For employers, the most important thing to understand is this:
Once the IRS issues a Lock-In Letter, the employer is required to follow it.
Here’s what you need to know.
Why Does the IRS Issue a Lock-In Letter?
Normally, employees complete Form W-4, Employee’s Withholding Certificate, and employers use the information provided to calculate federal income tax withholding.
Employers generally aren’t responsible for determining whether an employee has completed their W-4 “correctly.” The IRS, however, can review an employee’s withholding.
The IRS uses information reported on Forms W-2 and other information in its records to identify employees who may have a serious underwithholding problem. If the IRS determines that an employee is not having enough federal income tax withheld, it can issue what is commonly called a Lock-In Letter to the employer.
The letter specifies the withholding arrangement the employer must use for that employee, which may include the employee’s permitted filing status and limits on adjustments, credits, or deductions used in calculating federal income tax withholding.
In other words, the IRS is essentially telling the employer:
“Going forward, this is how we want you to calculate this employee’s federal income tax withholding.”
What Should the Employer Do When a Lock-In Letter Arrives?
The first step is to read the letter carefully and note the effective date.
The IRS will provide the employer with withholding instructions and a copy of the notice for the employee. Under current IRS guidance, if the employee is still employed as of the date of the notice, the employer must provide the employee copy within 10 business days of receiving it.
However, receiving the letter does not mean you should immediately change the employee’s withholding.
The Lock-In Letter will specify when the new withholding instructions become effective. The IRS generally requires the employer to begin withholding under the Lock-In Letter no sooner than 60 calendar days after the date of the letter. This gives the employee an opportunity to contact the IRS before the new withholding arrangement takes effect.
The employer should:
- Give the employee their copy of the notice within the required timeframe.
- Enter or schedule the IRS-mandated withholding instructions in the payroll system.
- Begin withholding according to the letter on the effective date specified by the IRS.
- Keep the Lock-In Letter with the appropriate payroll records.
- Make sure the employee cannot override the IRS instructions through an electronic W-4 system.
Can the Employee Just Submit a New W-4?
This is where employers need to be especially careful.
Once the Lock-In Letter takes effect, an employee cannot simply submit a new Form W-4 that reduces their federal income tax withholding below the amount required by the IRS.
If the employee submits a W-4 that would result in less withholding than the Lock-In Letter requires, the employer must disregard it and continue following the IRS instructions.
If the employee believes the withholding amount is incorrect, that is between the employee and the IRS.
The employee must contact the IRS and request a modification. If the IRS agrees, it will notify the employer of the revised withholding instructions.
On the other hand, if the employee submits a W-4 that results in more federal income tax being withheld than the Lock-In Letter requires, the employer must honor the employee’s request for the additional withholding.
A simple rule to remember:
The employee can increase withholding, but cannot decrease it below the IRS-mandated amount without IRS approval.
What If the Employee No Longer Works for Us?
If the employee no longer works for your company when you receive the Lock-In Letter, generally no immediate withholding action is required.
But don’t throw the letter away.
If the employee returns to work for your company within 12 months, the Lock-In Letter may still apply, and you should begin withholding according to the IRS instructions.
That makes proper documentation especially important.
What If We Receive a Modification Letter?
Sometimes the employee successfully works with the IRS to have the withholding instructions changed.
In that case, the employer may receive an IRS Letter 2808C, modifying the previous Lock-In instructions.
Unlike the original Lock-In Letter, there is not another 60-day waiting period for the modification. According to the IRS, the modification becomes effective immediately upon receipt.
What Happens If the Employer Doesn’t Follow the Letter?
This is one IRS notice employers don’t want sitting unanswered in someone’s inbox.
The IRS states that employers who fail to follow the Lock-In instructions can be held liable for the additional tax that should have been withheld.
That’s why employers shouldn’t make exceptions because an employee disagrees with the IRS determination.
You aren’t being asked to decide whether the IRS is right.
You are being instructed how to withhold the employee’s federal income tax.
Any dispute about the determination needs to be handled between the employee and the IRS.
The Payroll Partners Bottom Line
An IRS Lock-In Letter may be unfamiliar, but the employer’s responsibility is actually pretty straightforward:
Follow the letter.
Provide the employee with their copy, pay close attention to the effective date, update payroll according to the IRS instructions, and don’t accept a subsequent W-4 that would reduce withholding below the amount required by the Lock-In Letter unless the IRS authorizes the change.
And remember—the employer should not try to determine whether the employee deserves a different withholding amount. That’s the IRS’s job.
Your job is to make sure payroll follows the instructions provided.
At Payroll Partners, we know IRS notices and unusual payroll situations can create questions quickly. If you’re a Payroll Partners client and receive an IRS Lock-In Letter for an employee, send it our way. We’ll help make sure the appropriate withholding instructions are implemented in payroll and that you understand what needs to happen next.
Because when it comes to payroll compliance, sometimes the most important question isn’t “Why did the IRS do this?”
It’s “What do we need to do now?”
This information is provided with the understanding that Payroll Partners is not rendering legal, human resources, or other professional advice or service. Professional advice on specific issues should be sought from a lawyer, HR consultant or other professional.
