Sunday, January 4, 2009

Form W4-Employer's Perspective

Everything you need to know about your employees W4 is detailed in the article below from the IRS. If you have a small business, it is especially important that you know the what the IRS requires you to do.

When you hire an employee, you must have the employee complete a Form W-4 (PDF), Employee's Withholding Allowance Certificate. Form W-4 tells you, as an employer, how many withholding allowances to use when you deduct Federal income tax from the employees' pay. Form W-4 includes detailed worksheets to help the employee figure his or her correct number of withholding allowances. Employees may also want to access the withholding calculator on the IRS website at for help in completing Form W-4. Tell any nonresident alien employees to see the Form 8233 Instructions before completing a Form W-4
If an employee qualifies, Form W-4 is also used by the employee to tell you not to deduct any Federal income tax from his or her wages. To qualify for this exempt status, the employee must have had no tax liability for the previous year and must expect to have no tax liability for the current year. However, if the employee can be claimed as a dependent on a parent's or another person's tax return, additional limitations apply. See the instructions for Form W-4. A Form W-4 claiming exemption from withholding is valid for only one calendar year. To continue to be exempt from withholding in the next year, an employee must give you a new Form W-4 claiming exempt status by February 15 of that year. If the employee does not give you a new Form W-4, withhold tax as if he or she is single, with no withholding allowances. However, if you have an earlier Form W-4 (not claiming exempt status) for this employee that is valid, withhold as you did before.
After the employee completes and signs the Form W-4, you must keep it in your files. This form serves as verification that you are withholding federal income tax according to the employe's instructions and needs to be available for inspection should the IRS ever request it.
In the past, employers had to routinely send the IRS any Form W-4 claiming complete exemption from withholding if $200 or more in weekly wages was expected or claiming more than 10 allowances. Employers no longer have to routinely submit these Forms W-4 to the IRS. However, Forms W-4 are still subject to review. Employers may be directed (in a written notice or in future published guidance) to send certain Forms W-4 to the IRS.
The IRS will also use information reported on Forms W-2, Wage and Tax Statement, to more effectively identify employees with withholding compliance problems. In some cases, where a serious under-withholding problem is found to exist for a particular employee, the IRS may issue a notice (commonly referred to as a "lock-in-letter") to the employer specifying the maximum number of withholding allowances permitted for a specific employee. The lock-in letter will also specify the marital status for purposes of calculating the required withholding under the lock-in letter. The IRS will provide the employee with an opportunity to dispute the determination before the employer adjusts withholding based on the lock-in letter.
The IRS will send a letter to the employee explaining that the IRS will require the employer to start withholding additional income tax unless the employee contacts the IRS by telephone or in writing to explain why the employee should not have withholding increased. A toll-free number and address for the unit handling this program will be provided in the letter. As an additional safeguard, the employer will also receive a notice to provide to the employee.
After the lock-in letter takes effect, the employer must disregard any Form W-4 that claims more allowances or exempt status, until the IRS notifies the employer to withhold tax based on the new Form W-4. However, if, at any time, the employee furnishes a Form W-4 that claims a marital status, number of withholding allowances, and any additional withholding that results in more withholding than would result from applying the marital status and number of withholding allowances permitted in the lock-in letter, the employer must withhold tax based on that Form W-4. Employers who use electronic Form W-4 systems must make sure the employee can not override the lock-in letter to decrease withholding via an electronic Form W-4 system.
After the lock-in letter takes effect, if the employee wants to claim complete exemption from withholding or claim a number of withholding allowances more than the maximum number specified by the IRS in the lock-in letter, the employee must submit a new Form W-4 and a written statement to support the claims made by the employee on the Form W-4 to the IRS.
You should inform your employees of the importance of submitting an accurate Form W–4. An employee may be subject to a $500 penalty if he or she submits, with no reasonable basis, a Form W–4 that results in less tax being withheld than is required.
You should keep blank Forms W–4 for the current year on hand so you can provide them to your current and new employees. An employee may want to change the number of withholding allowances or his or her marital status on Form W–4 for any number of reasons, such as marriage, an increase or decrease in the number of dependents, or an increase or decrease in the amount of itemized deductions or tax credits anticipated for the tax year. Any of these reasons could affect the employe's tax liability. If you receive a revised Form W–4 from an employee, you must put it into effect no later than the start of the first payroll period ending on or after the 30th day from the date you received the revised Form W–4, assuming there is no lock-in letter in effect.
An employer can download and print Form W-4 from the IRS website at Taxpayers may also order Forms W-4 by calling 1-800-TAX-FORM (1-800-829-3676). TTY/TDD users may call 1-800-829-4059 to order Forms W-4. A substitute Form W-4, developed by the employer, may be used instead of the official Form W-4, if the employer also provides the tables, instructions, and worksheets contained in the Form W-4 in effect at that time. Employers may refuse to accept a substitute form developed by an employee and, if the form is rejected, the employee submitting such form will be treated as failing to furnish a Form W-4.
If an employee fails to give you a properly completed Form W–4, you must withhold federal income tax from his or her wages, as if he or she were single and claiming no withholding allowances. However, if you have an earlier Form W-4 for this employee that is valid, withhold as you did before.
Any unauthorized change or addition to Form W-4 makes it invalid. This includes taking out any language by which the employee certifies that the form is correct. A Form W-4 is also invalid if, by the date an employee gives it to you, he or she indicates in any way that it is false. When you get an invalid Form W-4, do not use it to determine federal withholding. Tell the employee that it is invalid and ask for another one. If the employee does not give you a valid one, withhold taxes as if the employee was single and claiming no withholding allowances. However, if you have an earlier Form W-4 for this employee that is valid, withhold as you did before.
For additional information, refer to Publication 15, (Circular E), Employer's Tax Guide, Publication 505, Tax Withholding and Estimated Tax, Publication 919, How Do I Adjust My Tax Withholding?, and the Withholding Compliance Questions & Answers on the IRS website at For the procedures for withholding income taxes on the wages of nonresident alien employees, refer to Notice 2005-76 and Aliens Employed in the U.S. on the IRS website at

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