To calculate how much federal income tax to withhold from an employee’s wages, the employee first needs to claim withholding allowances on Form W-4.
As an employer, you need to have an understanding of withholding allowances. How many allowances can employees claim, and when can they claim allowances? What are your responsibilities as an employer? Find out below.
What is the Form W-4 personal allowances worksheet?
All employees must fill out Form W-4. The form helps you determine how much federal income tax withholding (FITW) to subtract from each employee’s paycheck. Employees should fill out Form W-4 when they first start work at your business. Employees can give you an updated copy if they have any personal or financial changes.
On the form, employees claim personal allowances, which tell you how much federal income tax to deduct.
What are personal allowances?
Personal withholding allowances let you know how much federal income tax to withhold from an employee’s wages. The more allowances the employee claims, the less federal income tax you withhold from their earnings. The fewer allowances the employee claims, the more federal income tax you will withhold.
Employees can claim Form W-4 allowances for multiple items, including themselves, a spouse, and dependents, among other things.
What is an exemption from withholding?
An employee can be completely exempt from federal income tax withholding. What does claiming exempt mean?
A tax exempt employee will not claim any withholding allowances. Instead, the employee should claim exemption on line seven of Form W-4. When an employee claims exemption, you will not withhold any federal income tax from their wages.
To keep the exemption from federal income tax, the employee must turn in a new Form W-4 by the deadline for payroll exemptions each year.
You and the employee can get more information about the exemption on Form W-4.
How many allowances can an employee claim?
Employees can claim as many allowances as they want. There is no limit.
In the past, employers had to send an employee’s Form W-4 to the IRS if the employee claimed more than 10 allowances. This is no longer required. Do not send Form W-4 to the IRS unless the service asks you to.
What are the employer responsibilities?
When an employee begins work at your business, enact their withholding allowances starting with the first paycheck. If an employee gives you a new Form W-4, put it into effect as soon as possible. You should put the new allowances into effect no later than the first payroll ending 30 days or more after the employee turns in the personal allowance worksheet.
If for some reason an employee does not give you a Form W-4, you should withhold federal income tax at the greatest rate (as if the employee is single with no allowances).
If an employee does not claim all the allowances they are entitled to, you do not have to refund overwithheld federal income tax. The employee has to wait to get a refund from the IRS when they file their individual tax return.
While you generally do not have to send the personal allowances worksheet to the IRS, the IRS might ask you to do so. If the IRS sends you a notice requesting you to send forms, follow the instructions.
Sometimes the IRS will send you a letter—called a lock-in-letter—that tells you to use a specific number of allowances for an employee. If you receive a lock-in-letter, follow the instructions until you are told otherwise.
Easily follow your employees’ requested allowances with Patriot’s online payroll software. Enter the number of allowances for each employee, and we’ll calculate how much to withhold from each paycheck. Try it out for free.
This article is updated from its original publication date of 12/26/2014.