On January 3, 2022, the IRS posted a revised Form W-4P, Withholding Certificate for Pension or Annuity Payments*, and new Form W-4R, Withholding Certificate for Nonperiodic Payments and Eligible Rollover Distributions, both for optional use beginning in 2022 and required for use in 2023. Prior to revision and throughout 2021, payees used Form W-4P to tell payers the correct amount of federal income tax to withhold from taxable payments for periodic and nonperiodic payments from pensions, profit-sharing, stock bonus, annuity, certain deferred compensation plans, individual retirement arrangements (IRAs) and commercial annuities, and eligible rollover distributions. As revised, Form W-4P is used for taxable periodic pension and annuity payments, and new Form W-4R is used for taxable nonperiodic payments and eligible rollover distributions. Basically, the old W-4P was split into two forms.
The primary reason the IRS split Form W-4P into two forms was to simplify withholding information for payees. This makes very good sense from a consumer perspective. The prior Form W-4P pertained to different types of payments, each with their own withholding requirements. While separate instructions were provided for each type of payment, distinctions between types of payments were minimal, the actual certificate portion of the form appeared somewhat confusing in usage of the term “periodic”, and the certificate also appeared to permit a payee to choose to have no federal income tax withheld even if, with some distributions, this is not an option.
Another reason the IRS split Form W-4P into two forms was 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.
Specific form changes
The current/revised Form W-4P, which does not pertain to the payments with default withholdings, continues to utilize dollar amounts, has clear steps to follow in calculating the dollar amounts and features only one worksheet. 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.
Among these many positive changes, however, the IRS also made a very unusual decision exclusive to Form W-4R. On January 20, 2022, IRS Publication 15-A, Employer’s Supplemental Tax Guide, for use in 2022, was posted. Within this publication the IRS set out several additional requirements if this form is set up to be used as a “substitute form” to the paper Form W-4R. A “substitute form” is when you use and format parts of an IRS form to fit certain products or types of transactions. The additional Form W-4R-specific substitute form requirements include the following:
- Electronic systems must exactly replicate the text from the face of the paper Form W-4R between lines 1 and 2, with the exception that electronic systems that are being used exclusively for nonperiodic payments may omit the second bullet, and systems that are being used exclusively for eligible roll-over distributions may omit the first bullet
- Electronic systems must also exactly replicate the text on line 2 and the 2022 Marginal Rate Tables (inclusive of all related text above and within the tables) as they appear after the paper Form W-4R
- No pop-ups or hoverboxes are permitted, and if the electronic system has toggles for those steps that limit the amount of text that is viewable, the toggles must be off as the default
- If the electronic system places steps on different pages, users must be required to go to each page before they may electronically sign the form
- The electronic system must also include a hyperlink to Form W-4R on IRS.gov or include the General and Specific instructions in their entirety in the electronic system interface itself (that is, inclusion of only some of this information requires a link to the form), and
- Specific references on Form W-4R to “page 2” of Form W-4R should be linked to where the information is located.
In comparison to the usual substitute form requirements contained in IRS Revenue Procedure 2021-42, as reproduced as IRS Publication 1167, General Rules and Specifications for Substitute Forms and Schedules, these new Form W-4R substitute form requirements are not only highly unusual, but they also virtually limit providers to using the full original form and are likely to cause other substantial revisions to documents currently featuring a substitute Form W-4P.
The IRS has stated it understands that these form conversions and withholding option changes will take time for the industry to adopt and incorporate into their processing systems. Mandatory usage of Form W-4R has been delayed to January 1, 2023, and the IRS has provided special instructions if 2021 Form W-4P forms are used in 2022 (see, IRS Publications 15-A and 15-T). However, they have also made clear that payers should update their system programming for the 2022 forms as soon as possible and are encouraged to begin using them in 2022 as soon as that programming is in place.
Due to the information above, we highly recommend that all financial institutions who support nonperiodic payments and eligible rollover distributions immediately review the new IRS Form W-4R, begin taking steps to implement system programming to accommodate the form and its new percentage rate requirements, and make plans to address interim processing of the associated payee requests in 2022.
* On January 31, 2022, the IRS posted a revised Form W-4P for 2022. With the revision, the amounts on line 4 of the Step 4(b) Deductions Worksheet were corrected. The current Form W-4P, with ‘(Rev. January 2022)’ indicated in the upper left side of the form’s caption, should be used instead of the form posted on January 3, 2022. If the earlier 2022 form was used, the amounts calculated by that form’s worksheet may cause a payee to have less tax withheld than expected.For an opportunity to learn more about IRAs and other tax-advantaged accounts, including Health Savings Accounts and Coverdell Education Savings Accounts, consider the Wolters Kluwer IRA Library or on-demand video training offered on a variety of topics. Go here to learn more about training opportunities available to you or call us at 1-800-552-9408.