Whenever you hire a new employee, there is certain paperwork the worker needs to fill out before starting. Some of the paperwork is required by the government. Form W-4 is one such piece of required paperwork all new employees must fill out.
Before hiring your first employee, you should be able to answer, “What Is a W-4 form?” Below, you will learn about the form, what information is on it, how to use it, and how to store it.
What is a W-4 form?
Form W-4, Employee’s Withholding Allowance Certificate, is an IRS form that your new employees must complete when they start at your business. On the form, employees claim withholding allowances. The number of withholding allowances an employee claims helps you determine how much federal income tax to withhold from their wages.
The W-4 form has multiple parts. There is the Personal Allowances Worksheet, two additional worksheets, two tables, and the Employee’s Withholding Allowance Certificate. Not all employees will need to use the additional worksheets and tables.
What is a W-4 form used for?
Your employees will use the worksheets and tables to determine their allowances and any additional withholding amount.
Once employees figure out their withholding allowances, they should complete the certificate. The certificate requires information about each employee’s name, address, marital status, and total allowances, among other things.
Employees must give the finished certificate to you for your records.
So, what are withholding allowances exactly?
What are withholding allowances?
Employees can claim withholding for personal allowances for many reasons, including themselves, a spouse, and children. There is no maximum number of allowances an employee can claim. Form W-4 walks employees through the process of choosing the correct number of withholding allowances.
You will use the claimed allowances to determine the amount of federal income tax withholding that will be taken from employee wages. The more allowances an employee claims, the less federal income tax you withhold. The fewer allowances an employee claims, the more federal income tax you withhold.
To determine exactly how much federal income tax to withhold, you will use the tax tables in IRS Publication 15. You will then base the withholding amount on the total wages and total allowances.
Some employees might be tax exempt from federal income taxes. This means you will not withhold any federal income taxes from the employee’s wages.
To claim exemption from withholding of federal income tax, an employee must write “Exempt” on line 7 of Form W-4.
Withholding allowances do not expire, but an exemption from withholding does. Employees claiming exempt on W-4 must give you a new Form W-4 every year by the deadline for exemptions, February 15.
To learn more about exemption from withholding, see Form W-4 and Publication 505.
Can employees update Form W-4?
Employees can update their Form W-4 at any time. Employees simply need to fill out a new certificate and give it to you.
There are common times when employees might give you a new Form W-4. Employees might decide to adjust their withholding allowances after they see the results of their annual income tax returns. Employees also often update their allowances after a family status change, like a change in marital status or number of dependents.
If an employee gives you a new W-4 form, you must implement the changes within a certain amount of time. You must put the changes into effect no later than the payroll period ending on or after the 30th day after you received the new form. But, if the allowance change is for the next year, wait to start the changes until the following year.
Your employer responsibilities
As the employer, you do have some Form W-4 responsibilities.
When you receive a new Form W-4 from an employee, record the allowances or exemption in your payroll processing system. That way, you can accurately withhold the correct amount of federal income tax in your following payrolls.
If an employee doesn’t give you Form W-4, withhold federal income taxes at the highest rate (single with no allowances).
Sometimes the IRS will send a notice stating the maximum number of allowances an employee can claim. The IRS might send a notice because an employee continuously owes large amounts of federal income tax, among other reasons. The notice is called a “lock-in letter.”
If you receive a lock-in letter, the employee will have a certain amount of time to dispute it with the IRS. After that time, you must honor the letter. You must follow the instructions on the letter until you are told otherwise.
For more information about lock-in letters, check Publication 505.
Form W-4 recordkeeping
You do not have to send Form W-4 to the IRS unless it requests to see the form. You must keep a copy on file, though. You must keep Form W-4 on file for each employee for four years after the date the tax becomes due or is paid, whichever is later.
Keep a copy of an employee’s Form W-4 in the cloud with Patriot’s HR Software. You can share the form with your employee so they can review it, too. The HR software is an inexpensive add-on to our low-cost payroll software. Start a trial and test both for free.