On your employee's first day on the job, you are required to ask them to complete federal Form W-4, Employee's Withholding Certificate. (Multiple language versions are available here.) The employee enters various data onto the form — including their tax filing status, whether they have multiple jobs, any credits they have, the amount of other income they earn or receive, and the amount of deductions available to them. Together, these considerations let them compute how much you should withhold from each paycheck for federal income tax.
Accurate W-4s help the employee avoid two financially undesirable situations: overpaying taxes throughout the year and thus having less take-home pay, or owing a balance at tax time.
Completing the form
Employees can calculate or adjust tax withholding by using the W-4 tax calculator:
- By entering their personal information, they will see how much tax will be withheld. They can then adjust to find the withholding that's best for them.
- There are also worksheets to help employees figure their correct adjustments.
They should also revise their withholding by completing a new Form W-4 after major life events such as:
- Getting married
- Adding a new member to the family through birth or adoption
- Ceasing to claim a child as a dependent, generally because the child is filing their own taxes
After receiving a new W-4 form from an employee, you have 30 days to start the updated withholding. Begin the changes with the first pay period after this 30-day window. The new withholding amount should be adjusted to make up for any under-withholding from earlier in the year.
It is a good practice to let employees know that they may complete a new Form W-4 each year. You may establish an electronic system to send and receive the forms.
Words to the wise
If an employee fails to give you a properly completed Form W-4, you must withhold federal income taxes as if the employee is single or married filing separately. This means that a single filer's standard deduction will be used to determine withholding.
While some employees may claim to be exempt from withholding in order to receive more income throughout the year, you could let them know that this might subject them to interest and underpayment penalties, along with owing the whole year's taxes in April.
However, an employee is genuinely exempt if one of these two situations applies:
- In the prior year, the employee had a right to a refund of all federal income tax withheld because there was no tax liability.
- In the current year, the employee expects a refund of all federal income tax withheld because the employee expects to have no tax liability.
You might want to get help from your accountant as W-4s can be complicated to process.
Retain all Forms W-4 in your records for at least four years to serve as verification that you're withholding federal income tax according to the employee's instructions. The forms also need to be available for inspection should the IRS ever request to see them.