A W-4 Form, or Employee’s Withholding Certificate, gives you the information you need to determine how much money to withhold from your employees’ paycheck each pay period to pay their income taxes. Employees must fill it out properly and submit it to you before their first pay day to avoid a big tax bill and penalties in April. There are five parts, and it shouldn’t take more than a few minutes to complete.
Did you know? In 2020, the IRS modified the W-4 Form to simplify it and make it more accurate. Most employees now only need to fill out Steps 1 and 5. However, we’ll explore the entire form so you can advise your employees on filling it out to their best advantage.
How Form W-4s Work
New hires should complete the W-4 form and submit them to you as soon as possible after they begin working for you; you need time to process it before you start doing payroll. You’ll use the information they enter, i.e., marital status, dependents, etc., to cross reference the IRS withholding table, so you know how much money to deduct from their paychecks. You’ll eventually report the tax withholding on their year-end W2 form.
You must implement the new W-4 Form by the start of the employee’s first official payroll period ending on or after the 30th day from the date you receive it. For example, consider an employee who is paid bimonthly (on the 15th and last day of the month). He turns in his W-4 on Nov. 12th. You need to set up his employee record and pay using the new W-4 Form by Dec. 15.
Note: You cannot accept a W-4 Form by email or fill it out for an employee. They must sign it in person. You can receive it in print or through electronic systems that comply with IRS regulations.
If you want to learn about more forms employers are responsible for filling out or collecting, check out our payroll forms article.
Federal or State Form W-4s
Many states use their own Form W-4 instead of the federal form. Colorado, New Mexico, North Dakota, and Utah are using the federal form. Other states have their own form instead of or in addition to the federal one. Check with your state to see which you need.
Using the W-4 Form to Determine Withholdings
Once you have the W-4 Form, you use it and the withholding tables in Publication 15, Employer’s Tax Guide, to determine how much you withhold. You must deposit your withholdings. If you use payroll software, it may calculate and deposit the taxes for you.
Dangers of Withholding Too Much or Too Little Taxes
Employers are not subject to penalties for underpaying withholdings unless it is because they do not process the W-4 in time. However, employees can be hard hit if they underpay taxes. The most obvious consequence of underpaying taxes is receiving a large tax bill in April or when filing.
There are penalties if the underpayment is significant: If the employee owes more than $1,000 after subtracting withholdings and credits or if they paid less than 90% of taxes for the current year. There are circumstances where such penalties can be waived, such as in the event of a casualty or disaster, or if they retired during the year.
While withholding too little in income taxes does not impact you as an employer (income taxes are not employer taxes), it can create significant hardship for your employee, which can affect employee morale or cause them to need a pay advance.
Tips to Help Your Employees Complete W-4 Form
It’s not only in your best interest to get the W-4 Forms filled out correctly and on-time, but it also helps your employee too. Here are some tips for getting the forms done right.
- Set a deadline: New employees who do not provide you with a Form W-4 must be treated as a single filer with no adjustments, meaning you’ll withhold the highest amount allowed. However, they must eventually submit the form. Give them a deadline, preferably before their first paycheck.
- Make filing it out part of orientation: Including the W4 Form with the orientation paperwork you give out upon making a new hire ensures it will get done in a timely manner.
- Remind new hires to use the name on their legal documents: To avoid confusion with identification, remind your employees to use their legal names—those on their Social Security cards—rather than nicknames or pen names.
- Keep it simple: The new form is designed to be simple, so if you know the employee does not have any of the deductions noted on the form, encourage them to fill out Parts 1 and 5 and turn it in.
- Walk through the process of how to fill out W4 Form with your employees: Even the simplest form can confuse a first-timer. Explain how to fill it out, and walk them through the calculations if needed. Explain how to do dependent calculation and when to use other adjustments or deductions.
- Offer video assistance: Create a how-to video for orientation, or find one on YouTube. (Money and Life TV has a very detailed video, with markers for specific sections and a spreadsheet for examples.)
Parts 1 and 5 Are Mandatory
The only parts that an employee needs to fill out are 1 and 5. Part 1 provides contact information and filing status, and Part 5 is the signature block. Be sure the employee signs the form with their legal name. If employees only complete these two sections, the IRS will direct you withhold money based on their filing’s standard deduction without any other adjustments.
As an Employer, you need to fill out the Employers Only section in Part 5.
Multiple Job Section on the Form W-4
Part two is for employees with multiple jobs or those that have a spouse who also works and will be filing taxes jointly with them. Some employees may not want to fill this out; it is not mandatory. If they choose to fill this out, they have three options for estimating withholdings.
- IRS Tax Withholding Estimator: The IRS says this is most accurate, so you may want to recommend they take the time to use this online tax withholding estimator.
- Multiple Jobs Worksheet: The worksheet provided on Page 3 of the full Form W-4 is simple to follow. Advise employees not to use this unless your company is their highest-paying employer. If your company isn’t their highest paying employer, recommend they redo the W-4 for the employer that pays them the most. If they are married filing jointly, this means the highest paying employer between them and their spouse.
- Check the box in Option C: Advise employees to do this if they only have two jobs and both are similar in pay.
Qualifying Dependents on the Form W-4
Employees with children or those who have a qualifying relative living with them and depending on their income may qualify for tax credits. Tell your employee that they need to earn less than $200,000 in total income (from all income sources) if single or less than $400,000 if married filing jointly in order to qualify for dependent-related credits.
Not claiming dependents is an easy way to make sure more money is withheld upfront. Therefore, many people will elect not to claim dependents in order to have more withheld now and receive a refund at the end of the year. It can also help if your employee has had problems with paying a tax bill and needs to repay the IRS for a past debt.
Other Adjustments and Deductions on the Form W-4
Another way your employee can avoid a big tax bill is by requesting that you withhold an additional amount. Advise them to consider this option if:
- They have had tax bills in the past
- They want a refund
- They file 1099s for self-employment, contract work, interest, or dividends
- They receive pensions or Social Security retirement benefits
Sample Tax Withholding Estimate Using Form W-4
Let’s look at two examples:
Simple W4 Form Example
Jack Creton is single, and this is his only job. All he needs to do is fill out parts 1 and 5 and turn it in. You’ll pull his withholdings according to the standard filing.
Complex W4 Form Example
Misha Llewen is a more complex case. She is married, has children, and does contract work on the side. She has the higher-paying job, so she is filling out the Form W-4 completely to get her family the optimum withholdings. Here are her circumstances that reflect on the form:
- Step 1: She is married filing jointly.
- Step 2: She is choosing to use the worksheet on Page 3 of the form. (See below.)
- Step 3: She has two children, ages 10 and 13.
- Step 3: Her mother lives with them and qualifies as a dependent.
- Step 4a: She does contract work that earns $2,000 a year on average.
Rather than using the IRS Online estimator, she chose to use the worksheet on pages 3 and 4 of the Form W-4.
To determine multiple job adjustments (Step 2b on the main form):
- Step 2a: She has the higher-paying job. (She makes $60,000 a year; he makes $45,000 a year).
- Step 2b: Her husband has an additional job that earns $11,500 a year.
- She pulls the numbers from the chart on Page 4 of the Form W-4.
- Step 3: You pay her monthly.
To determine deductions (Step 4b on the main form):
- Step 1: They itemize deductions for their mortgage and charities. Last year, that was $15,400.
- Step 4: She is paying off a student loan. Interest last year was $425, and she’s assuming that again this year.
- Step 4: They contribute $2,000 to their independent IRAs.
Processing Changes to Employee Form W-4s
Employees who filled out the old Form W-4 do not need to fill out a new form. However, they may want to fill out a new form if they have a lifestyle change that affects their taxes. You should suggest filling out a new form if you know they have experienced any of these events:
- New baby or dependent
- Working more than one job
- Gain a new income source, such as a pension
- Significant pay changes, such as a bonus or large commission
- Complained of a large tax bill last year
- Want to change their withholdings for any reason
Changing to the new form is as easy as submitting it for the first time. If an employee does not change to the new form, then you will continue withholding according to the information on the old form.
As an employer, your only responsibilities are ensuring an employee turns in a Form W-4 correctly and withholding taxes according to the information they supply. Although you won’t be penalized, if employees do not properly fill out the form, they can be hit with a big tax bill in April and even penalties. Taking time to instruct them on how to fill out a W4 Form properly can save them money and help employee morale.