This report indicates which employees are marked Blocked or Exempt from taxes in the HCM system. There is an important distinction between these two employee flags:
BLOCKED EMPLOYEE: Refers to employees who wrote “Exempt” on line 7 of the form W-4; telling you not to deduct any federal income tax from his or her wages, HOWEVER, wages are reported as taxable to all agencies.
EXEMPT EMPLOYEE: Refers to employees who are working for a US employer on a specific visa type that exempts them from tax liability under IRS rules. This indication in the HCM system does NOT report wages as taxable to any agencies on the W2. For more information on visa types and taxation rules visit the IRS website: https://www.irs.gov/individuals/international-taxpayers/aliens-employed-in-the-us-social-security-taxes
Action Required for Blocked Employees
Annual Withholding Update: To qualify for this exempt status, the employee must have had no tax liability for the previous year and must expect to have no tax liability for the current year. A Form W-4 claiming exemption from withholding is valid for only the calendar year in which it’s filed with the employer. To continue to be exempt from withholding in the next year, an employee must give you a new Form W-4 claiming exempt status by February 15 of that year. If the employee doesn’t give you a new Form W-4, withhold tax as if he or she is single, with no withholding allowances NO LATER THAN FEB 15. However, if you have an earlier Form W-4 (not claiming exempt status) for this employee that’s valid, withhold as you did before.
Lock-In Letters: The IRS uses information reported on Forms W-2, Wage and Tax Statement, to identify employees with withholding compliance problems. In some cases, where a serious underwithholding problem is found to exist for a particular employee, the IRS may issue a notice (commonly referred to as a “lock-in-letter”) to you specifying the withholding rate and maximum number of withholding allowances permitted for a specific employee for purposes of calculating the required withholding. The IRS will provide the employee with an opportunity to dispute the determination before you adjust withholding based on the lock-in letter.
The IRS will send a letter to the employee explaining that the IRS will require you to start withholding additional income tax unless the employee contacts the IRS to explain why the employee shouldn’t have withholding increased. A toll-free number and address for the unit handling this program will be provided in the letter. As an additional safeguard, you’ll also receive a notice to provide to the employee.
After the lock-in letter takes effect, you must disregard any Form W-4 that results in less tax withheld, until the IRS notifies you otherwise. However, you must honor any Form W-4 that results in more income tax withheld than at the withholding rate and withholding allowances specified in the lock-in letter. Employers who use electronic Form W-4 systems must make sure the employee can’t override the lock-in letter to decrease withholding via an electronic Form W-4 system. Lock-in letter provisions also apply to employees rehired within 12 months from the date of the notice.
After the lock-in letter takes effect, if the employee wants to claim complete exemption from withholding or claim a withholding rate, withholding allowances, or an additional amount that results in less income tax withheld than the lock-in letter, the employee must contact the IRS. A toll-free number and address for the unit handling this program is provided in the lock-in letter.
Click the IRS link to review all rules surrounding the Form W4: www.irs.gov/taxtopics/tc753.html