Are You Ready To Implement Updated Withholding Forms W-4P and W-4R in 2023?
In 2022, the IRS released new federal tax withholding election Form W-4P, Withholding Certificate for Periodic Pension or Annuity Payments, and Form W-4R, Withholding Certificate for Nonperiodic Payments and Eligible Rollover Distributions, for optional use in 2022 and required use in 2023. The intent is to provide for more accurate federal income tax withholding, which unfortunately adds to the complexity of the forms.
As we get closer to the end of 2022, it is a good time for plan sponsors for all public and private retirement plans to be sure that they are on track to implement the new federal tax withholding election forms no later than January 1, 2023.
The IRS has finalized the worksheets, computational bridge steps, and updated withholding tables for 2022, which will allow systems to complete their programming for the new tax withholding procedures and updated withholding tables. Additionally, the final release of 2022 IRS Publication 15-T provides helpful clarification on the different withholding approaches that will be available for pension and annuity payments in 2022.
The IRS split Form W-4P into two forms to call out that there are default percentage withholdings for certain types of payments (10 percent for nonperiodic payments and 20 percent for eligible rollover distributions) and the prior IRS Form W-4P was designed only to capture dollar amounts to be withheld. Further, that form featured three worksheets and two tables to do the calculations.
The new Form W-4R, which pertains to the payments with default withholdings, very clearly identifies the default withholding rates and captures only withholding amounts that are different from the default rates. Those rates will now need to be expressed as a whole number percentage, 0 to 100 percent. This will be a change for payees who in the past may have chosen to have the 10 percent minimum plus an additional dollar or percentage amount of federal income tax withheld from their nonperiodic payments. Additionally, when 0 percent is entered by a payee it means that no amount is withheld or that withholding has been waived. The new Form W-4R also features only one table to assist payees in selecting an appropriate withholding percentage rate.
As plan sponsors review and update their withholding forms, procedures, and communications for these anticipated changes, we can assist with questions and recommended strategies. Contact us today.
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