Blog: 2023 Tax Season Reminder - Form W-4R

As the old adage states: there are two certainties in life, death and taxes. While both are certain, they are not equal. Most of us cannot get through the day without encountering a tax of one form or another – whether its income tax, excise tax, property tax, sales tax, Social Security tax or something else. Taxes are all around.

April 18, 2023, marks the federal tax filing deadline; this is the last opportunity for most taxpayers to submit 2022 tax returns to the Internal Revenue Service (IRS) and pay tax owed in a timely manner (the deadline for taxpayers requesting an extension is October 16, 2023).[1] This is the final tax season before full adoption of a newly required form that impacts participants receiving payments from nonqualified deferred compensation plans. Use of Form W-4R, Withholding Certificate for Nonperiodic Payments and Eligible Rollover Distributions became required on January 1, 2023.

Who is impacted by Form W-4R?
Form W-4R applies to individuals who wish to specify a withholding amount from nonperiodic payments, which include nonqualified deferred compensation plan distributions, eligible rollover distributions from employer retirement plans and individual retirement arrangements (IRAs). To accommodate this withholding, plan sponsors are responsible for working with their payroll companies to ensure that Forms W-4R can be accepted and applied to distribution payments. If a plan participant who receives nonperiodic payments does not submit a Form W-4R, a default withholding rate will be applied to the payment.

Note: the introduction of Form W-4R does not establish or impose any new rules requiring the withholding of funds for federal income taxes from nonperiodic payments. Rather, Form W-4R merely provides an opportunity to specify a withholding rate for those who may be subject to income tax as a result of receiving nonperiodic payments.

What do plan sponsors need to know?
Delivery of Form W-4R, Withholding Certificate for Nonperiodic Payments and Eligible Rollover Distributions became required on January 1, 2023, and there are a variety of ways in which the IRS permits plan sponsors to deliver the form to applicable parties. For example, plan sponsors can establish a system to electronically receive Form W-4R from employees or payees so long as the system adheres to the five guidelines set forth in the IRS’s Publication 15-A (2023), Employer's Supplemental Tax Guide[2]. They can also accept telephonic submissions of Form W-4R provided certain scripts are used in a given situation. Id. Lastly, plan sponsors can provide plan participants with a paper substitute of Form W-4R, as long as it includes the 2023 Marginal Rate Tables and form instructions. Id.

What should plan participants know about Form W-4R?
If plan participants wish to specify withholding amount from nonperiodic payments, Form W-4R, or an approved substitute, must be submitted to the plan sponsor. On the form, plan participants can elect to have a rate of 0% to 100% of the payment they are set to receive withheld from their distribution. If no election is made or Form W-4R is not submitted, a default rate of 10% will be withheld from distribution.

Form W-4R is a straightforward form comprised of two sections; Section 1 asks for name, Social Security number and address, and Section 2 asks for the rate election. That’s it. Aside from the signature and date lines, these are the only sections that need to be completed on the form. However, Form W-4R includes general instructions and 2023 Marginal Rate Tables, which are meant to serve as an informative resource to help you select a rate depending on your income level and filing status.

Important Reminders for Taxpayers
It is important for nonqualified deferred compensation plan participants to remember that no Federal or state income taxes are taken out of the compensation deferred into the retirement plan or from the investment earnings until plan benefits are distributed (paid). Upon distribution, nonqualified deferred compensation plan payments are taxable as ordinary income but, in most cases, there is no taxation at capital gains rates available under nonqualified deferred compensation plans. Furthermore, FICA taxes are not owed on the distributions from the plan to the extent a Social Security tax withholding of 6.2% of pay up to the Social Security Wage Base and Medicare tax withholding of 1.45% was withheld from the deferred income when it was deferred into the retirement plan.

Tax rates vary greatly depending on various filing criteria. Participants in nonqualified deferred compensation plans and other recipients of applicable nonperiodic payments should contact their tax professionals for more information about completing Form W4-R and filing other tax documents.

Planning Ahead
Additionally, it may be prudent for nonqualified deferred compensation plan participants to discuss how they can lower future income tax burdens by deferring compensation into their supplemental retirement plan and reducing their taxable income in a given year. While nonqualified deferred compensation plan participants can only elect their contributions once annually, typically in the fall, they can gain a better understanding of future tax burdens by mapping out their expected earned income and contrasting that with upcoming tax changes. By leveraging the expertise of their financial professional, plan participants can determine a path forward that is best suited for their individual financial and retirement objectives.

Click here to access current IRS tax rates and limits. To learn more about nonqualified deferred compensation plans, visit KBadmin.com.

[1] Internal Revenue Service. IRS sets January 23 as official start to 2023 tax filing season; more help available for taxpayers this year. January 12, 2023. Available at: https://www.irs.gov/newsroom/irs-sets-january-23-as-official-start-to-2023-tax-filing-season-more-help-available-for-taxpayers-this-year

[2] Internal Revenue Service. Publication 15-A (2023), Employer's Supplemental Tax Guide. 2023. Available at: https://www.irs.gov/publications/p15a