The Federal government requires every employer to deduct and withhold federal income, social security, and Medicare taxes from wages paid to employees. Federal income tax is based on filing status and the number of withholding allowances claimed by employees. The W-4 tells employers how many withholding allowancse employees claim and their marital status, or if they are claiming exemption from income tax withholding. Allowances reduce the amount of wages subject to federal income tax withholding, and employers must use one of the withholding methods prescribed by the IRS to calculate the exact amount of withholding. The IRS releases new versions of Form W-4, Employee’s Withholding Allowance Certificate, each year around the end of December for use beginning January 1. Employers must know and follow requirements for implementation, changes and recordkeeping for Form W-4 compliance.
Form W-4 Requirements
Employers must request and keep a completed Form W-4 Employee’s Withholding Allowance Certificate for each employee in either paper or electronic format. Newly-hired employees should complete and submit a signed Form W-4 to the employer on or before the first day of work as it is required to process wages. If employees fail to furnish a Form W-4 by the first pay period, employers must withhold at the single status with no allowances, maximizing the amount withheld, although it may not be the actual withholding status.
Employer payroll representatives should not advise employees as to how many allowances to claim. They can give employees a copy of IRS Publication 505, Tax Withholding and Estimated Tax to determine for themselves the appropriate number of allowances.
Employers do not withhold federal income tax when an employee claims to be exempt from withholding on a Form W-4. To qualify as exempt, employees must certify on the Form W-4 that they:
- Had a right to a refund of all federal income tax withheld in the prior year because there was no tax liability; and
- Expect to have no tax liability in the current year.
Employees who earn less than the standard deduction can usually claim to be exempt from withholding (see the following table), but earning less than these amounts does not guarantee that an employee qualifies for exemption.
2014 Standard Deduction Values:
• Married, filing jointly/qualified widow(er) – $12,400
• Married, filing separately – $6,200
• Head of household – $9,100
• Single – $6,200
• Personal exemption – $3,950
Amending Form W-4
Employees can file an amended payroll tax Form W-4 any time allowances change, such as increases for the birth of a child or decreases due to divorce or loss of a dependent. Employers are not responsible for tracking when employee allowances decrease. Employees are responsible for amending the W-4 within 10 days of a decrease for changes in withholding to be processed with the first payroll within 30 days of the amendment.
Implementing Form W-4
The employer must put a newly-hired employee’s Form W-4 withholding into effect for the first payroll period ending after the form is filed. The employer must keep the W-4 form for at least four years after the date of the last tax return (April 15, the Employee’s Form 1040, U.S. Individual Income Tax Return) that was filed using the information on the form. Employers are not responsible for advising employees on tax withholding or verifying the accuracy of employee withholding allowances. The requirements are mainly to keep a current and complete Form W-4 on file and use it to process employee payroll taxes.