11.3- Form W-4 -- Employees Withholding Allowance Certificate

For Employees: 

• Your entries on Form W-4, the Employee’s Withholding Certificate, determine how much tax your employer will deduct from your paycheck.

• The more accurately you fill it out, the less you will owe (or be owed) when you file your annual income taxes.

• The new W-4 form lets you adjust your withholding based on certain personal circumstances, such as a second job.

The 5 Steps of the W-4:  The W-4 has five steps, including one that is optional.

Step 1: This is the usual personal information that identifies you and indicates whether you plan to file your taxes as a single person, a married person, or a head of household.

Step 2: This part is for people whose circumstances indicate that they should withhold more or less than the standard amount. A spouse's income, a second job, or freelance income—which can all increase your tax liability—are factors that can be recorded here.

Step 3: This section is where you indicate the number of your children or other dependents.

Step 4: This optional section allows you to indicate other reasons to withhold more or less from your paycheck. Passive income from investments, for example, may increase your annual income and therefore your tax liability, or how much you'll owe. Itemizing deductions may lower the amount of taxes you owe. These may be reasons to adjust your withholding on the W-4.

Step 5: Your signature.

For Employers:

When you hire an employee, you must have the employee complete a Form W-4, Employee's Withholding Certificate. Form W-4 tells you, as the employer, the employee's filing status, multiple jobs adjustments, amount of credits, amount of other income, amount of deductions, and any additional amount to withhold from each paycheck to use to compute the amount of federal income tax to deduct and withhold from the employee's pay. If an employee fails to give you a properly completed Form W-4, you must withhold federal income taxes from his or her wages as if he or she were single or married filing separately with no other entries on step 2, 3, or 4 of the Form W-4. This means that a single filer's standard deduction with no other entries will be considered in determining withholding.

An employee may want to change the entries on Form W-4 for any number of reasons when his or her personal or financial situation changes. 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. You must honor the request unless the situations described below in the sections Invalid Form W-4 and Lock-in Letters apply.

You can download and print a Form W-4, order multiple copies, or call 800-TAX-FORM (800-829-3676) or 800-829-4059 for TTY/TDD users. You may also use a substitute Form W-4 you developed instead of the official Form W-4, if you also provide the tables, instructions, and worksheets contained in the Form W-4 in effect at that time. The substitute Form W-4 must contain language that's identical to the official Form W-4 and must meet current IRS rules for substitute forms. You may not accept a substitute form developed by an employee. The employee submitting such form will be treated as failing to furnish a Form W-4.

Form W-4 includes detailed worksheets to help the employee figure his or her correct adjustments. Employees may also want to access the IRS Tax Withholding Estimator for help in completing Form W-4. Nonresident aliens must follow special instructions when completing a Form W-4. Have your nonresident alien employees see Notice 1392, Supplemental Form W-4 Instructions for Nonresident Aliens and the Instructions for Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual before completing a Form W-4.

You may establish an electronic system to receive Forms W-4 from your employees. Refer to Employment Tax Regulations section 31.3402(f)(5)-1(c) and Publication 15-A, Employer’s Supplemental Tax Guide for more information.

You can provide the Spanish version of the Employee's Withholding Certificate, Form W-4 (SP) in place of Form W-4 to your Spanish-speaking employees.

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. Refer to Chapter 4 of Publication 17, Your Federal Income Tax For Individuals.

For additional information, refer to Publication 15, (Circular E), Employer's Tax Guide, Publication 15-T, Federal Income Tax Withholding Methods and Publication 505, Tax Withholding and Estimated Tax. For the procedures for withholding income taxes on the wages of nonresident alien employees, refer to Publication 15-T.

Exemption From Withholding

If an employee qualifies, he or she can also use Form W-4 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. A Form W-4 claiming exemption from withholding is valid for only the calendar year in which it's furnished to the employer. 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. This date is delayed until the next business day if it falls on a Saturday, Sunday or legal holiday. If the employee doesn't give you a new Form W-4, withhold tax as if he or she is single or married filing separately with no other entries in step 2, 3, and 4.

Invalid Form W-4

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, material defacing of the form, or any writing on the form other than the entries requested. 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's false. When you get an invalid Form W-4, don't use it to determine federal income tax withholding. Tell the employee that it's invalid and ask for another one. If the employee doesn't give you a valid one, withhold taxes as if the employee is single or married filing separately with no other entries in step 2, 3, and 4. However, if you have an earlier Form W-4 for this employee that's valid, withhold as you did before.

Recordkeeping Requirements

After the employee completes and signs the Form W-4, you must keep it in your records for at least 4 years (see Publication 15, (Circular E), Employer's Tax Guide and Topic No. 305 Recordkeeping). This form serves as verification that you're withholding federal income tax according to the employee's instructions and needs to be available for inspection should the IRS ever request it. Form W-4 is still subject to review. You may be directed (in a written notice or in future published guidance) to send certain Forms W-4 to the IRS. You must be able to supply a hardcopy of an electronic Form W-4.

Lock-in Letters

The IRS uses information reported on Forms W-2, Wage and Tax Statement to 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 you specifying the filing status, multiple job adjustments, and maximum amount of credit or deductions permitted for a specific employee for purposes of calculating the required withholding (see Publication 15, (Circular E), Employer's Tax Guide). The IRS will provide the employee with an opportunity to dispute the determination before you adjust withholding based on the lock-in letter.

The IRS will send a letter to the employee explaining that the IRS will require you to start withholding additional income tax unless the employee contacts the IRS to explain why the employee shouldn't 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, you'll also receive a notice to provide to the employee.

After the lock-in letter takes effect, you must disregard any Form W-4 that results in less tax withheld, until the IRS notifies you otherwise. However, you MUST honor any Form W-4 that results in more income tax withheld than at the withholding arrangement specified in the lock-in letter. Employers who use electronic Form W-4 systems must make sure the employee can't override the lock-in letter to decrease withholding via an electronic Form W-4 system. Lock-in letter provisions also apply to employees rehired within 12 months from the date of the notice.

After the lock-in letter takes effect, if the employee wants to claim complete exemption from withholding or claim a filing status, multiple job adjustments, or an amount of credits or deductions that results in less income tax withheld than the lock-in letter, the employee must contact the IRS. A toll-free number and address for the unit handling this program is provided in the lock-in letter.