When you hire an employee, you need to have them fill out new hire paperwork. One form you must have new employees fill out and keep in your records is Form W-4. So, what is a W-4 form? What is the purpose of Form W-4? Read on to find out the answers to these W-4 questions and more.
What is a W-4 form?
Form W-4, Employee’s Withholding Certificate, is an IRS form an employee must fill out when they start working at your business. On the form, your employees must input the following:
- Name
- Address
- Social Security number
- Filing status (e.g., Single)
- Multiple job or spouse work information (if applicable)
- Number of dependents (if applicable)
- Adjustments (if applicable)
- Signature
There are also a couple of worksheets on the form that employees can use to help determine multiple jobs and deduction information. Depending on the employee, they may be able to skip over certain sections of the form (e.g., claiming dependents).
As an employer, use the employee’s completed Form W-4 to determine how much to withhold in federal income tax (FIT) from employee wages.
Although the employee must fill out the majority of IRS Form W-4, there is a small portion at the bottom of the form that employers need to complete. Employers must input the following information on the form:
- Employer’s name and address
- Employee’s first date of employment
- Employer Identification Number (EIN)
Recent Form W-4 changes
In 2020, the IRS released a new W-4 form that removed withholding allowances (e.g., 0). The new form was designed to make the Form W-4 process easier and make federal withholding more accurate.
In the past, employees could claim withholding allowances to lower the amount of federal income tax withheld from their wages. But with 2020 and later forms, employees can no longer claim allowances. Instead, they must claim dependents or use the deductions worksheet and enter the amount on the form to lower their tax withholding.
For example, before 2020, an employee with one child could claim one allowance. With the new Form W-4, an employee with a dependent child must look at their dependent’s age to determine the amount of the child tax credit and the credit for other dependents that they may be able to claim. Dependents under 17 have a dependent amount of $2,000, while dependents over 17 have a $500 amount.
New hires who receive their first paycheck after 2019 must use the 2020 and later version of Form W-4 when they begin working. And, employees who need to update information on their W-4 need to use the newer version.
You may have two versions of Form W-4 in your records: 2020 and later W-4s as well as 2019 and earlier W-4s. This can make manual payroll calculations difficult. To standardize your W-4s, you can convert a 2019 and earlier form to a 2020 and later form by using an optional computational bridge. With the computational bridge, employers can use four steps to convert older forms and treat them like newer forms. However, you must keep the original W-4 in your records.
Although withholding allowances were eliminated on the federal form, some states may continue to use withholding allowances to determine state income tax withholding.
What is a W-4 form used for?
Again, the purpose of a W-4 form is to determine an employee’s federal income tax withholding amount. Employees use the tables and worksheets to fill out the form. Then, you use the form to calculate the employee’s FIT withholding.
To determine how much FIT to withhold from an employee’s wages, use the tax tables in IRS Publication 15-T. Use the information from the employee’s W-4 form (e.g., filing status) and the IRS tax tables to determine the employee’s withholding amount.
Keep in mind that IRS Publication 15-T also includes tax tables that work with 2019 and earlier W-4 forms. Ensure you look at the correct tax table before determining the employee’s withholding.
If you use payroll software, the software calculates the employee’s federal income tax withholding for you each time you run payroll. And if you use online payroll software, it will automatically update the tax tables for you each year.
Claiming an exemption on Form W-4
In rare cases, some employees may be exempt from federal income taxes. This means you do not withhold any federal income tax from the employee’s wages.
Only certain employees can be exempt from federal income tax. An employee is exempt if they:
- Had no federal income tax liability in the previous year
- Expect to have no federal income tax liability in the current year
If an employee is exempt from FIT, they claim it on Form W-4 by writing “Exempt” in the space below Line 4(c). Exempt employees must also fill out their name, address, SSN, and signature on their W-4 form.
Keep in mind that Form W-4 information does not expire. However, an exemption from withholding does. Employees claiming exempt on Form W-4 must give you a new form every year by February 15.
To learn more about exemption from withholding, look at Form W-4’s General Instructions and IRS Publication 505.
What to do if an employee needs to update their IRS W-4?
Employees can update their Form W-4 at any time. An employee may need to update their form due to a major life change (e.g., getting married or having a baby). Or, they may decide to update their W-4 form to adjust their withholding amount.
If an employee needs to make any changes to their form, they must fill out a new version of Form W-4.
After the employee completes the new form, you must implement the changes within a certain amount of time. Put the changes into effect no later than the payroll period ending on or after the 30th day after you receive the new form.
If the employee is updating a form for the next year, wait to implement any changes until the following year.
Your employer Form W-4 responsibilities
Sure, your employees fill out most of Form W-4. But as an employer, you have a few Form W-4 responsibilities, including:
- Filling out the bottom employer portion of Form W-4
- Recording W-4 information in your payroll processing system
- Withholding taxes after you receive the form
- Keeping all W-4 forms in your records for at least four years
In some cases, you may receive an IRS lock-in letter informing you and your employee that the employee has not had enough FIT withheld. Generally, the letter instructs the employer to withhold federal income tax at a higher rate.
If you receive a letter from the IRS, correct the withholdings based on what the notice says within 60 days. However, keep in mind that the employee does have the opportunity to appeal or change their withholdings.
After an employee fills out Form W-4, you need to store it in your records. Securely keep a copy in the cloud with Patriot’s online HR software. The HR software is an inexpensive add-on to our online payroll. Try both for free today!
This article has been updated from its original publication date of April 3, 2017.
This is not intended as legal advice; for more information, please click here.