Attention small business owners: The W-4 deadline is approaching. If any of your employees claimed an exemption from federal withholding last year, they’ll need to fill out a new Form W-4 by February 15 to continue the exemption.
What is the exemption?
Form W-4—the Employee’s Withholding Allowance Certificate—is one of the required documents new employees must fill out before you can run payroll for them. On this form, employees can claim personal allowances. For each allowance, the employee’s total federal income tax withholding (FITW) reduces. An employee can also be completely exempt from FITW.
Employees can claim an exemption from federal withholding if they meet both of these conditions:
- The employee had the right to a refund of all federal income tax withheld because they had no tax liability last year.
- The employee expects a refund of all federal income tax withheld this year because they will have no tax liability.
Even if an employee meets these two qualifications, they cannot be exempt if they are claimed as a dependent on someone’s tax return, and the employee’s income is more than $1,050 including more than $350 of unearned income (e.g., interest).
Do W-4 forms expire?
Typically, a Form W-4 does not expire. You can continually use the allowances on an employee’s Form W-4 to calculate FITW. However, Form W-4 exempt status expires. If an employee claims exemption from withholding, they must fill out a new Form W-4 every year.
When an employee claims exemption from withholding, they only need to fill out lines 1, 2, 3, 4, and 7 on Form W-4.
If the employee does not give you a new form by February 15, the employee’s current exemption from withholding expires on February 16.
What if the employee files a new exemption?
If the employee submits a new Form W-4 by the February 16 deadline, you must continue the exemption from FITW for the next year. This means you will not deduct any FITW from the employee’s paycheck.
What if the employee misses the Form W-4 deadline?
If the employee does not give you a new form by the Form W-4 deadline, they are no longer exempt from FITW.
Here’s what you should do:
- For the next payroll, you must use the employee’s last valid Form W-4 that had withholding allowances. Use the allowances marked on this Form W-4 to calculate the employee’s FITW.
- Alternatively, you can deduct FITW from an employee’s wages as if they claimed single with zero allowances. You will have to use this method if you do not have a previous Form W-4 for the employee.
Example: When you first hired Jack in 2013, he gave you a Form W-4 claiming married with three allowances. In 2015, Jack gave you a new Form W-4 claiming exempt from FITW. Jack did not file a Form W-4 claiming exempt in 2016. You could use Jack’s previous Form W-4 and deduct his FITW as married with three allowances. Or, you could deduct his FITW as single with zero allowances.
If an employee completes a new form to claim exemption from withholding after the Form W-4 deadline, you can change the employee’s payroll tax settings to reflect the exemption for future payrolls. But, do not refund the employee any taxes from when they did not have exempt status.
This article was originally published 12/2/2014.