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 employee's pay. Form W-4 includes detailed instructions, and a worksheet to help the employee figure his or her correct number of withholding allowances.

Form W-4 is also used by an 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, and has income exceeding $750.00 which includes more than $250.00 of non-wage income, such as interest income on a savings account, the employee cannot claim to be exempt. Employees who claim exemption from withholding must complete a new Form W-4 by February 16th each year to continue claiming exempt status.

After the employee completes and signs the Form W-4, you should keep it in your files. This form serves as verification that you are withholding federal income tax according to the employee's instructions. Do not send it to the IRS.

However, if you receive a Form W-4 on which the employee claims more than 10 withholding allowances, or claims exemption from withholding and his or her wages would normally be expected to exceed $200 or more a week, you must send a copy of that Form W-4 to the IRS service center with your next employment tax return along with a cover letter giving your name, address, EIN, and the number of forms included. If you want to submit the Form W-4 earlier, you can send a copy of the Form W-4 to your IRS service center. Your service center will send you further instructions if it determines that you should not honor any Form W-4.

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. There is no penalty if your employee doesn't claim enough withholding allowances and has too much withheld.

You should keep blank Form W-4's 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 filing 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 employee'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.

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 was single and claiming no withholding allowances.

For additional information, refer to Publication 15 (PDF), Circular E, Employer's Tax Guide, Publication 505 (PDF), Tax Withholding and Estimated Tax, and Publication 919 (PDF), How Do I Adjust My Tax Withholding.

Tax Topics & FAQs | 2001 Tax Year Archives | Tax Help Archives | Home