Understanding Form W-4: A Guide To Compliance For Employers

Photo of coffee and tax forms - form w-4

When you’re hiring, the amount of paperwork you have to keep track of can be overwhelming. Even if new employees are responsible for completing the necessary documents, like Form W-4, they still may have general questions about what they need to do – and turn to you for help.

It’s important that onboarding documents be filled out correctly, so you’ll want to be familiar with the rules.

Complete Payroll Solutions has a team of certified HR professionals who assist companies throughout the Northeast with a wide range of employee management tasks, starting with when you recruit and onboard workers.

One question we hear a lot from clients is “What do I need to know about Form W-4?” To help you understand what you and your workers need to do to comply with the form’s requirements, here’s what we’ll address:

  • What Form W-4 is used for
  • Who fills out a W-4
  • How to fill out Form W-4
  • W-4 recordkeeping requirements

After reading this article, you’ll have the insight you need into Form W-4 to help answer questions from new hires about how to fill it out correctly.

What is Form W-4 used for?

Form W-4 is an IRS document that employees must complete to let their employers know how much money to withhold from their paycheck for federal taxes. This amount is based on several factors, including:

  • Filing status
  • Dependents
  • Other income
  • Anticipated credits and deductions

The amount an employee authorizes to be withheld then counts towards the annual income tax due at the end of the year. If they overpay their taxes based on the withholdings they indicate on the W-4, they’ll be entitled to a refund. Conversely, if their taxes are underpaid, then they’ll have to pay more to the IRS at tax time and may even risk penalties.

In addition to having new hires complete a Form W-4, it should also be filled out when an employee’s personal or financial situation changes, such as when they get married or have a child. To help employees avoid big surprises in April, it’s a good idea to remind them to consider completing a new Form W-4 each year. There’s no limit on the number of times an employee can fill out a new W-4.

Once you receive a new form, you’ll need to begin withholding at the revised amounts no later than the first payroll period ending on or after the 30th day after the employee provided it to you.

If an employee doesn’t have any changes to their W-4, then the W-4 on file remains in effect until an employee provides a new one. 

Who is responsible for filling out a W-4?

As an employer, you are required to provide a Form W-4 to each new employee. This can be either a hard copy form or you can set up an electronic system for receiving Forms W-4 from your employees as long as it complies with IRS regulations.

Once an employee has the form, they are responsible for the completion and accuracy of the document. The only step you as an employer need to take is to enter your name, address, and Employer Identification Number (EIN) at the bottom as well as the first date of the worker’s employment.  

Be sure to have new employees complete the form as soon as possible but at least before you issue their first paycheck. If the employee doesn’t return a form, then you’ll withhold tax as if they were single, with no withholding allowances. 

How do employees fill out Form W-4?

Employees can be subject to a $500 penalty if they submit, without a reasonable basis, a Form W-4 that results in less tax being withheld than is required. So it’s important that they understand how to complete it correctly.

A new Form W-4 was released for the tax year 2020 with a new design and no longer uses allowances. Instead, it asks questions that are intended to make accurate withholding easier for employees. However, since this new form looks different from what they may have seen before, employees may have some questions about how to complete it.

For assistance on how to complete the form, you should encourage employees to use the IRS’ Tax Withholding Estimator tool.

To answer additional questions your employees may have, here’s a step-by-step breakdown of what’s required.

Enter Personal Information

This section of the form will ask employees for their name, address, Social Security number, and tax filing status. It’s important to note that this section is located on the top right side of the W-4 directly under the year since it’s often missed due to its unusual placement on the form.

Account For Multiple Jobs Or A Working Spouse

This section only needs to be completed if the situations apply to the employee. Depending on the option the employee chooses to determine the appropriate amount to enter here, they may need to reference a Multiple Jobs Worksheet on page three of the form.

Claim Dependents

This section is used to determine any amount of the child tax credits and credit for other dependents an employee may be able to claim when filing their tax return.

Account For Other Adjustments

This optional section is designed to capture other income that’s not subject to withholding, additional withholdings the employee may want to request, and deductions they want to be reflected. For employees who plan to itemize deductions, there’s a worksheet included with the form.

Sign

This section should be signed and dated by the employee. Without a signature, the form isn’t valid.

It’s important that you communicate to employees that it’s their responsibility to complete the form correctly. Employers are not liable for an inaccurate or invalid form. 

W-4 Recordkeeping Requirements

When an employee completes a Form W-4, you don’t need to submit it to the IRS but should keep it for four years. However, in certain circumstances, you may need to submit copies of Forms W-4 for certain employees to ensure they have adequate withholding. The IRS will direct you in writing if you need to submit a form.

If the IRS determines that an employee doesn’t have enough withholding, then it will require you to increase the amount by issuing a “lock-in” letter, which is referred to as Letter 2800C. This letter will specify the maximum number of withholding allowances allowed for the employee. 

How can I ensure employee onboarding compliance?

There’s a lot to think about when you bring on a new employee. One of the most important steps you need to take is ensuring all onboarding documents are completed correctly and on time. That includes Form W-4, but there’s much more to staying compliant when onboarding new hires.

While the employee is responsible for filling out this form and you should avoid giving specific advice about calculating withholding, it’s a good idea to familiarize yourself with the requirements in case workers have general questions about how to complete it.

To get started bringing on your next employee, access Form W-4 and other new worker onboarding forms on our resources page.

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