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

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?

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.

Richard Chapo is with http://www.businesstaxrecovery.com - recovering overpaid taxes for small businesses. Visit our article section - http://www.businesstaxrecovery.com/articles - to read more tax articles.

In The News:

Efficient tax design  Economic Times
JR Ball: The real villain when it comes to property taxes  Greater Baton Rouge Business Report

Complaince of Tax Return in Electronic Commerce Taxation

Emerging Legal issues of Tax compliance of e-business Self-assessment system... Read More

Surprising Truths About Tax Preparers

Choosing the right tax preparer for your business is a... Read More

Save Money on Taxes - Is the Only Way to Get Your Tax Savings is to Sleep With an IRS Agent?

Tilting the Tax Laws in Your Favor.In order to accelerate... Read More

How to Maximize Your Home Business Tax Deductions for 2005

Someone once said, 'the best way to calculate your taxes... Read More

A Taxing Investment

April 15 - The most dreaded day of the year... Read More

Access to E-records by Taxing Authorities: A Case for Pakistan (Part II)

All tax authorities to e-commerce transactions should investigate the record... Read More

Navigating The Internet Sales Tax Laws

QUESTION: I have been contacted by my local city... Read More

Access to E-records by Taxing Authorities: A Case for Pakistan (Part I)

Background issues of access to recordsTo assess the records at... Read More

Paying Workers ? What Can You Write-Off?

As your business grows, you are going to need help.... Read More

Corporations Failing To Claim AMT Exemption Overpay Taxes By $11,000

Does your incorporated business pay alternative minimum tax ["AMT]? If... Read More

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

Employers often ask employees to designate the amount of tax... Read More

Donating Cars To Charity - New Tax Rules

On June 3, 2005, the IRS released guidance on charitable... Read More

Business Tax Loophole: Leasing Assets To Your Corporation

While there are many equally valid reasons to incorporate, saving... Read More

Employment Taxes ? What Are They?

If you have employees, you are responsible for paying a... Read More

Tax Trap #5 -- Ignoring The IRS (and the 5 best ways to contact them!)

We all love to criticize the IRS, don't we? And... Read More

The Annual Gift Tax Exclusion: Getting The Edge

Whether helping the kids with a down payment on their... Read More

Tax Audits: What Signs Make You More Likely to be Audited by the IRS?

It's a major fear for most Americans: A notice from... Read More

How to Reduce the Estate Tax Using the A-B Revocable Living Trust

In a past article I relayed the plight of the... Read More

Tax Tips for Home-Based Business Owners

As tax time approaches, many home-based business owners begin completing... Read More

Need an Offshore Sales Office in a Tax Free Environment?

The 100 year old investment-banking firm of... Read More

Small Business Tax Issues for Self-Employed Individuals

The United States is a nation of entrepreneurs. There are... Read More

Business Tax Deductions

As we enter mid-March, taxpayers begin to become very interested... Read More

Failure To Pay Employment Taxes ? Penalties

As an employer, you must pay employment taxes if you... Read More

10 Thoughts on Tax Offer in Compromise

Beware of advertisements that claim to settle tax debts for... Read More

Home Based Business Tax Deductions

Running a home based business reaps many wonderful tax deductions... Read More