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How to Manage Form W-4

March 11, 2024 by Rudy Mahanta, CPP

All employees working in the U.S. must complete Form W-4, which employers use to calculate federal income tax withholding from employee paychecks. While employees complete Form W-4, it’s crucial for employers to understand its purpose and their responsibilities, especially given the significant updates made by the Internal Revenue Service (IRS) in 2020.

Form W-4 provides employers with essential information, including the employee’s filing status, adjustments for multiple jobs, credits, other income, deductions, and additional details necessary to compute the correct income tax withholding from employees’ paychecks. Since the data required for Form W-4 can change yearly, employees are encouraged to update their forms annually.

Form W-2, the Wage and Tax Statement, works in conjunction with Form W-4. The calculations from Form W-4 are utilized alongside an employee’s annual earnings to generate Form W-2.

If employees fail to submit a properly completed Form W-4, employers must withhold federal income taxes as if they were single with no adjustments. In the event that employers receive a revised Form W-4 from an employee, they are required to implement it no later than the start of the first payroll period ending on or after the 30th day from the date they receive the updated form. Employees may also request to be exempt from withholding, but only if they had no tax liability in the previous year and expect the same for the current year.

Update

Changes to Form W-4 were introduced largely in response to the 2017 Tax Cuts and Jobs Act and were aimed at simplifying accurate income tax withholding. The new form no longer employs withholding allowances as a mechanism to account for additional income, deductions, and tax credits. However, it includes lines where employees can directly enter these amounts for use in calculating the withholding amount.

Although the IRS doesn’t require all employees to complete a new form, it is mandatory for newly hired employees whose first payment occurs after 2019 or for employees seeking to adjust their withholding. For example, if employees experience life changes such as marriage, divorce, or having children, they must complete a new form to reflect adjustments in their filing status or dependency credits.

Understanding the Different Sections

The new Form W-4 comprises five sections, each with straightforward questions regarding the employee’s income, deductions, adjustments, and credits. Employees are required to complete sections one and five, along with any other sections that apply to their circumstances. Step 1: Personal Details

In this section, employees enter standard personal information that identifies them and indicates their intended tax filing status, whether single, married, or head of household.

Step 2: Multiple Jobs and Spousal Income

This section covers information about any additional jobs related to the employee’s taxes, such as a spouse’s income, a second job, or freelance income.

Step 3: Dependents

Employees indicate the number of children or other dependents they have. To claim a dependent, they must earn less than $200,000 or $400,000 if filing jointly.

Step 4: Other Adjustments

This section allows employees to outline other reasons for withholding more or less from their paychecks. It may include self-employment income, standard deductions, extra withholdings per pay period, and, if applicable, an employee claiming exemption from withholding. Step 5: Signature and Date

To complete Form W-4, employees must sign and date it.

On the employer’s side, they can utilize the IRS Income Tax Withholding Assistant and updated Publication 15-T to determine the appropriate amount to withhold from an employee’s paycheck.

Form W-4 Common Mistakes

Apart from understanding what Form W-4 is, employers should be vigilant about common mistakes made when completing and submitting this form. It’s essential to recognize that Form W-4 is considered invalid if it contains unauthorized changes or false information.

Firstly, it is illegal for employers to complete Form W-4 on behalf of the employee or accept a form that has been illegally modified. If an employee has altered the language or structure of the form, the employer has the right to reject it. Additionally, while employers should remind employees to update their Forms W-4 before December 1 of each year, they cannot instruct employees on specific entries. Instead, they should guide employees to use the instructions on the form, IRS troubleshooting tools, and available worksheets. Finally, employers should remind employees that only sections one and five are mandatory. Sections two to four are completed only by those employees claiming dependents, secondary jobs, or additional adjustments. .

Staying on Top of Form W-4 Responsibilities

While employees fill out their own Forms W-4, employers may think their role ends with collecting and utilizing the information for withholding and keeping the forms on file. However, understanding what Form W-4 is and how and when to complete it is crucial for employers. This understanding ensures they can fulfill their obligations and address any potential issues. For example, employees may write “exempt” on the withholding portion of the form or claim an unusually high number of withholding allowances to avoid federal or state tax withholding.

Moreover, employers should consider the recent changes made to Form W-4. Although introduced to simplify the process, understanding what Form W-4 entails and when and how to complete it can help both employers and employees calculate accurate withholdings and avoid penalties. To stay on top of Form W-4 responsibilities, employers can streamline payroll processes and ensure accurate completion of every form related to employee withholding, issued by federal, state, and local governments. This approach ensures regulatory compliance and auditability across all tax jurisdictions.

Improve your tax withholding process to ensure accuracy and compliance with regulatory deadlines with Experian Employer Services.

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