Understanding Form W-4: The Employee’s Withholding Certificate
When a new employee begins working for you, one of the first forms they must complete is Form W-4, Employee’s Withholding Certificate. (You can find versions of the form in several languages here.) This document allows employees to provide information such as their filing status, number of jobs, available tax credits, other sources of income, and potential deductions. These details determine how much federal income tax you need to withhold from each paycheck.
Accurate W-4 information helps employees avoid two common problems: paying too much in taxes throughout the year and receiving smaller paychecks, or paying too little and facing a tax bill when they file their return.
Completing the Form
Employees can determine or adjust their withholding by using the IRS Tax Withholding Estimator:
-
By entering their personal and financial information, they can see an estimate of how much tax will be withheld.
-
They can then make adjustments to achieve the desired withholding amount.
-
The W-4 form also includes worksheets to help employees figure out the right adjustments.
Employees should update their W-4 anytime they experience a major life change, such as:
-
Marriage
-
The birth or adoption of a child
-
No longer being able to claim a dependent (for example, when a child files their own tax return)
Once an employee provides a new W-4, you have 30 days to implement the updated withholding. Apply the change starting with the first pay period after that 30-day period. The new withholding rate should also account for any under-withholding that occurred earlier in the year.
It’s a good idea to remind employees that they can review and submit a new Form W-4 each year. You may also choose to use an electronic system for distributing, completing, and collecting these forms.
Words to the Wise
If an employee does not provide you with a completed Form W-4, you must withhold federal income tax as though the employee is single or married filing separately. In this case, the standard deduction for a single filer is used to calculate withholding.
Some employees may try to claim exemption from withholding to increase their take-home pay, but they should understand that doing so without qualifying could result in penalties, interest, and a large tax bill at filing time.
An employee may legitimately claim exemption only if one of the following applies:
-
In the previous year, they were entitled to a full refund of all federal income tax withheld because they had no tax liability.
-
In the current year, they expect to receive a full refund of all federal income tax withheld for the same reason, they anticipate having no tax liability.
Because the W-4 process can be complex, consulting with an accountant or payroll specialist can help ensure accuracy and compliance.
Employers must retain all Forms W-4 for at least four years as proof that withholding was done in accordance with each employee’s instructions. These forms must also be available for review if requested by the IRS.
