When you hire an employee, you must have the employee complete a Form
W-4. The 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. There are detailed
instructions to the employee on the form, with a worksheet to help the employee figure his
or her correct number of withholding allowances.
The 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 nonwage income, such as interest income on a savings
account, plus wages totaling $650.00 or more, the employee cannot claim to be exempt.
Employees who claim exemption from withholding must complete a new Form W-4 by February
15th each year to continue claiming exempt status.
After the employee completes and signs the Form W-4, you should keep it in your files.
Do not send it to IRS. This form serves as verification that you are withholding federal
income tax according to the employee's instructions. If a change such as marriage will
mean a change to an employee's name, remind the employee to obtain a social security card
showing the new name.
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 Form 941
return -- or with a cover letter. The service center will send you further instructions if
it determines that you should not honor the 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 properly allowable.
There is no penalty if your employee doesn't claim enough withholding allowances and has
too much withheld.
You should keep blank Forms W-4 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 the Form W-4 for a 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. Any of these 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.
If an employee fails to give you a 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
For additional information, refer to Publication 15, Employer's
Tax Guide, Publication 505, Tax Withholding and Estimated
Tax, and Publication 919, Is My
Withholding Correct for 1997?, by calling 1-800-829-3676.
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