The Definitive Guide to W-4 Federal and State Withholding Forms
If you’re an HR professional, the recent updates to the W-4 guidelines might have you scratching your head. Reforms to the Tax Cuts and Jobs Act have triggered some key updates to the W-4 filing requirements. You may be feeling nervous about making sure you dot all your i’s and cross all your t’s. The updates aren’t meant to trip you up, though.
Instead, they’re meant to make employees’ withholding more accurate. That way, they’ll be paying the right amount of taxes every month.
The following sections will walk you through the basics of W-4 compliance that every employer needs to know!
What is the W-4 form?
The Employee’s Withholding Allowance Certificate, or W-4 form, helps ensure that employers withhold the right amount of money from employees’ paychecks. It’s basically a tool that employers use to calculate this amount. Every new employee must fill out this form.
The W-2 and W-4 forms are used in tandem, with the W-4 gathering information about employee income and the W-2 reporting it at tax time. They’re like two sides of the same coin.
Key takeaway: The W-4 form helps ensure you’re withholding the right amount of money from employees’ paychecks.
What are the federal W-4 form requirements?
Here’s what every HR department needs to know about getting its staff’s W-4 forms completed.
Who must complete the W-4 form and when?
You must have a W-4 form on file for all employees. However, independent contractors do not fill out the W-4 — instead, they would complete a W-9 form.
You need to collect a new W-4 for employees who fall into any of these three categories, according to the Society for Human Resource Management (SHRM):
- New hires. Have all new employees fill out a W-4 form.
- Those with a change in life circumstances that may affect their withholding. For instance, if an employee has gotten married or divorced, or gained a new dependent, she should fill out a new W-4 form. That way, her current form will reflect the correct number of allowances and withholding status.
- Those who wish to claim exemption from withholding. If an employee wants to claim exempt status, he can currently use Form W-4 to instruct you not to deduct federal income taxes from his paycheck. (Note: This may change for 2020, as we’ll discuss.) Make sure he completes a new W-4 form by February 15 of the year for which he wants to claim exemption. He’ll need to complete a new form every year if he wants to keep claiming exemption.
How can an employee qualify for an exemption? He must have had no tax liability for the past year, and he must expect to have no such liability for the present year, the IRS explains. Inform an employee of these requirements if he says he wants to claim exemption.
Ideally, workers should fill out a new W-4 every year, the IRS recommends (although this isn’t a hard-and-fast rule). Traditionally, employees have often just filled out the form when they were first hired.
Why fill it out again? Given the recent changes to withholding requirements, filling out the form again may help employees better manage their money. Rather than being floored with a low tax refund (which happened to a lot of people in the past year), they’ll pay the right amount throughout the year.
You must then keep the form in your files for at least four years, even if the employee later submits a new one. However, you’re not required to submit the form to the IRS unless the agency asks you to.
Key takeaway: Tell employees they should fill out a new W-4 if they fall into any of the above categories.
Guidance from the IRS
As The Street points out, the IRS offers several helpful worksheets that help people figure out their tax allowances.
- The IRS Personal Allowances Worksheet, geared toward all individual taxpayers.
- The IRS Deductions and Adjustments Worksheet, for helping taxpayers determine which deductions they’re eligible for before filling out the W-4 form.
- The IRS Two-Earners/Multiple Jobs Worksheet, for people with more than one employer or with a working spouse.
- The IRS Withholding Calculator. This handy tool gives every employee an easy way to find out if they’re making the correct payments.
Key takeaway: Tell your employees about these tools so that they’ll be on point with their reporting. Encourage them to use the IRS’ Withholding Calculator for a fast “paycheck checkup.” The IRS urges people to recheck their withholding at the start of 2020 as well.
What are some common mistakes with the W-4 form?
- Filling out the form on behalf of an employee, which is illegal.
- Giving employees advice on what to state on the form. Give them information on their requirements, but not personalized assistance with filling out the form. You can also point them toward the tools provided by the IRS, mentioned above.
- Not telling employees that they need to fill out a new form if they fall into the categories listed above.
- Failing to implement safeguards in an online W-4 filing system to prevent employees from modifying their forms after the IRS has begun to investigate their withholdings.
You obviously would not want to accept a form that has been altered or substituted from the original, either. If an employee turns in a W-4 that seems to have been modified in any way, do not accept it. Instead, ask the employee to fill out another. Look over each W-4 form that employees fill out to ensure that the employee has written only in the appropriate spaces.
Key takeaway: Give prompt reminders and timely advice, but don’t overstep.
How has the federal W-4 been updated recently?
Passed in 2017, the TCJA overhauled existing regulations, updating the W-4 form. “Among the changes were new tax brackets, standard deductions, and expanded credits for families with children,” reports Time.
The Tax Cuts and Jobs Act (TCJA) almost doubled the standard deduction while doing away with personal exemptions and limiting some itemized deductions. The TCJA also brought lower tax rates and an increase in the Child Tax Credit.
Here’s how the standard deduction has increased:
- $12,000 for single people
- $18,000 for those who are heads of households
- $24,000 for married couples who are filing jointly.
Meanwhile, the Child Tax Credit has increased to $2,000 per qualifying child, along with a new $500 credit for other dependents who qualify.
In 2019, many people have been surprised to receive lower refunds than expected, as Time reports.
Why? Changes to withholding tables are often the culprit, says Time. Withholding tables serve as a guide that helps employers deduct the correct amount of taxes from employees’ paychecks. “Under the new law, many people saw less money taken out of their paychecks, which has led to smaller tax refunds,” the authors explain.
People who didn’t change the amount they wanted withheld on their paycheck are most likely to be startled by a lower refund this year.
The IRS provides a complete list of all W-4 form revisions here.
Make sure your HR department has current W-4 forms at the ready. You don’t want to accidentally have an employee fill out an outdated form, only to realize later it was from 2017!
Key takeaway: Give your employees updated guidance on the current requirements.
What new changes are in store?
The IRS is planning to roll out further changes for next year. It just issued a draft of the form W-4 that will take effect in 2020.
The IRS considered feedback from HR professionals and tax accountants when creating the draft W-4 form. “The primary goals of the new design are to provide simplicity, accuracy and privacy for employees while minimizing burden for employers and payroll processors,” IRS Commissioner Chuck Rettig explained in the IRS announcement.
What changes can you expect to see in the revised form? “The redesigned Form W-4 no longer uses the concept of withholding allowances, which was previously tied to the amount of the personal exemption,” the announcement states. “Due to changes in the law, personal exemptions are currently not a central feature of the tax code.”
The revised form will also simplify employees’ instructions for accounting for multiple jobs. Rather than providing complicated worksheets for dealing with multiple jobs, it will list three different options that employees can choose from.
In 2018, the IRS published an earlier draft form of the updates to W-4 instructions. These updates are meant to more fully incorporate the changes in personal income tax initiated by the TCJA. Think of it as a continued work in progress!
Originally, the IRS planned to implement these changes in 2019. However, it postponed them while it incorporated feedback from tax and payroll professionals. The changes make the form more complex, which is likely to remain the case with the finalized changes — even though the IRS is working to simplify things with the revisions.
To help staff navigate the changes, you might provide a training session on the W-4.
Again, your entire staff will not be required to complete a new form. Rather, you’ll continue using their most recently completed W-4 to determine withholding requirements. All new employees and all those who wish to make changes to their W-4 must use the updated form once it takes effect.
Expect to see a near-final draft in mid-to-late July 2019 and proposed instructions for employers in the next several weeks. Want to share your feedback with the IRS? The agency is accepting comments on the draft for a 30-day period, until July 1, 2019 (email WI.W4.Comments@IRS.gov with any feedback).
Key takeaway: Expect more changes to the W-4 for 2020. Make sure you provide employees with current forms for the new year if they need to make updates.
What variations exist in states’ withholding requirements?
At the state level, you’ll often find additional requirements for determining employees’ withholding amounts. UCLA presents a list of state-specific forms and the agencies that issue them. (However, not every state has a state-level W-4 form that must be completed.)
For example, the Alabama Department of Revenue issues Form A-4, and the Iowa Department of Revenue issues Form IA W-4. Many states rely on a variation of the federal W-4 form.
In some cases, states are updating their requirements in response to the federal reforms. Often, they’re seeking ways of keeping taxpayers happier, striving to appear a more attractive place to live.
Vermont enacted its own tax reform package in 2018 for this reason. The Green Mountain State updated its form again in early 2019, introducing a state-level personal exemption as well as other tax credits, exemptions and deductions, the Vermont Department of Taxes explains.
In some states, like Wisconsin, an employee may opt to file a state-level withholding form (in Wisconsin, Form WT-4) to claim withholding allowances that differ from her federal allowances.
Why? The state may offer additional allowances that the employee is eligible for. In Wisconsin, if the employee wishes to claim the same allowances on both forms, she only needs to fill out the federal W-4.
Key takeaway: Your state’s requirements may have changed (or might be about to change). Check with the agency responsible for your state’s tax requirements to learn about any recent updates.
What are the potential repercussions for incorrect filing?
Employees could receive a $500 penalty if they claim allowances that they have no reasonable basis to claim, the IRS says. However, employees are unlikely to incur a penalty if they owe less than $1,000. Why? Due to recent confusion about the updated requirements, the IRS has offered a little relief. If taxpayers paid 85% of the required tax (as opposed to the standard 90%), they won’t receive the low-payment penalty, says Forbes.
How does the IRS evaluate the validity of a W-4 form? It cross-references the W-4 against the employee’s W-2, which states that person’s income and tax requirements. If the IRS determines that an employee is claiming too many allowances, it may issue a “lock-in letter.” This notice states the withholding rate and maximum number of allowances for that employee.
If you receive a lock-in letter for a particular employee, that notice will tell you how much to withhold. As you might imagine, you need to follow it to the letter. “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,” explains the IRS. However, if the employee provides a W-4 that signals more income tax should be withheld than what the lock-in letter requires, you should withhold the amount indicated by the W-4, says the IRS.
Using an electronic filing system? In that case, make sure employees don’t have the ability to override the requirements of the letter. In other words, they shouldn’t be able to go into the system and make changes that circumvent the instructions that the IRS gave you.
If the employee no longer works for you when you receive the letter, you are not required to take any action. However, if he returns, you must follow the guidelines of the letter.
Again, be sure to follow the lock-in instructions in full. An employer that does not follow the IRS lock-in letter instructions will need to pay the tax amount that should have been withheld.
After receiving a lock-in letter, an employee typically remains in the IRS’ withholding compliance program for three years. Continue following the IRS’ instructions until it notifies you that the employee has been released from the program.
The key takeaway: You are not required to verify that employees have claimed the correct allowances. You may have no reasonable way of knowing that. Rather, if the IRS itself determines that an employee has claimed the wrong allowances, you must follow the IRS’ instructions or face penalties equivalent to the taxes the employee should have paid.
What are some common FAQs on the W-4 and withholding?
Here are some common questions that many employers have about the W-4 updates.
What should I do if an employee submits a W-4 containing information that I believe is false?
If the employee has indicated that the info is false, you must reject the form and have the employee fill out a new one. However, if you simply believe it is false, but the employee hasn’t admitted that – what should you do?
In the article “Can an Employer Accept a W-4 Form from an Employee Claiming 99 Dependents,” SHRM shares advice on how to navigate that situation.
You must accept the form, says SHRM. You don’t have the right to decide that the info on it is false when an employee told you it is true. However, you should tell the employee that the IRS could later instruct you to increase withholding if it finds that the correct amount hasn’t been withheld, says SHRM.
If directed by the IRS to begin withholding taxes for an employee, you must, of course, do so unless the employee contacts the IRS and can provide adequate proof that he should receive the withholding status he has claimed, says SHRM. Again, the IRS will tell you what you need to do.
Am I responsible for verifying whether employees’ allowances have changed?
You don’t have to put your amateur sleuthing skills to the test. There’s no need to invade your employees’ privacy (even if that wouldn’t bring on a lawsuit).
As stated above, the employee is the one who needs to answer to the IRS if she claims the wrong number of allowances. Your job is to follow the instructions given to you by the IRS.
What should I do if an employee wishes to claim exemption but doesn’t complete a W-4 form?
In that case, rely on the last W-4 form that employee provided, if one exists. If the employee doesn’t fill out a W-4 form, withhold taxes based on the most recent valid W-4 you have for that individual that doesn’t claim exemption, says SHRM. If you don’t have one, treat the employee as a single person with no allowances, SHRM adds.
What information must I give my employees about updating their W-4?
Before December 1 of every year, remind staff that they must complete a new W-4 form if their allowances have changed or if they know that they will change for the coming year. Follow the forthcoming instructions for employers that the IRS will soon be issuing in regard to the W-4, too.
Which employees are most likely to need to update their withholding allowances?
According to SHRM, employees who fit into one or more of the following categories are most likely to need to complete a new W-4 form:
- Have two incomes or a spouse who also earns an income.
- Are not employed year-round.
- Have dividends or capital gains derived from securities that are held in taxable accounts.
- Claim tax credits, such as the Child Tax Credit or Earned Income Tax Credit.
- Had itemized deductions in 2017.
- Have a high income level, and thus, more complex tax returns.
People with older dependents – like children who are 17 or older – are also likely to make changes to their withholding allowances, the IRS notes.
If my employee claims more than 10 allowances, must I report this to the IRS?
While this used to be a requirement, employers no longer need to report this situation to the IRS. However, the IRS may request that you submit particular W-4 forms at its own discretion.
Although it’s crucial to know the ins and outs of W-4 compliance, it’s really not that tough. Make sure to provide employees with all pertinent information about when and how to fill out a new form, review each completed form carefully, and follow any instructions from the IRS to the letter. Do that, and you’ve fulfilled your W-4 responsibilities!