W4 Form Basics for Small Business Owners

w4 form

A W4 form is an essential document that every small business owner should collect from their employees before issuing their first paycheck.

While the IRS does not obligate you to report any information claimed by your employees on their W4, these forms are still subject to review. The revenue service may ask you to send the W4 form to them.

The repercussions of a new employee not submitting a W4 falls on them – with the possibility of having more tax withheld from their salary than supposed to be.

Read on and learn more about Form W-4 from your perspective as an employer.

What is a W4 Tax Form?

A W4 Tax Form, or Employee’s Withholding Certificate, is an IRS document containing information regarding the amount of tax to withhold from your employee’s paycheck. Using this form, you can calculate the payroll taxes and send the amount to the state and the IRS on behalf of your employee.

What is a W4 Tax Form

image: irs.gov
Here is the information that a W4 form tells you, as an employer:

  • Employee’s filing status
  • Multiple job adjustments
  • Amount of other income
  • Amount of credits
  • Deductions amount
  • Any additional amount to withhold from the employee’s paycheck

Without a properly filled-out W4 form, you must still withhold federal income tax from your employee wages. In this case, you’ll have to consider your employee as single with no other adjustments or deductions.

For a W4 to be legal and acceptable, it must contain pertinent employee information, such as:

  • Demographic
  • Marital status
  • Number of exceptions

It must also show a dollar amount for withholding and any exemptions. Alterations on the dollar amount of withholding can void a W4 form.

How Does an Employee Fill Out a W4 Form

The 2017 Tax Cuts and Jobs Act revamped many tax rules, including removing personal exemptions. As a result, the IRS revised the W4 form. No longer can employees lower the amount of federal income tax withheld from their paycheck by claiming allowances.

With this new 2020 Form W4, employees can only lower their tax withholding by claiming dependents or using a deductions worksheet.

Here are the steps your employees must do to fill out their W4:

Step 1: Enter the Personal Information

Employees must enter the necessary information that identifies them. It includes the legal name, address, Social Security Number (SSN), and tax-filing status.

Step 2: Multiple Jobs or Filing Jointly with Spouse

For employees who want to withhold more or less than the standard amount, this step is where they should make their declaration. Depending on their circumstances, they can specify their spouse’s income, their multiple jobs, or any income from their freelance work.

If they need further guidance in determining if they are exempt from withholding, direct them to the message written in the form before step two.

There are three options they can take here. Option (a) is the most accurate and uses the withholding estimator app from the IRS. Option (b) requires a manual entry in a separate worksheet, while option (c) is the easiest to complete because it assumes the jobs have similar pay.

Step 3: Claim Employee Dependents

Employees with a total income of less than $200,000 or under $400,000 (if filing jointly) are eligible for a child tax credit. Direct them to check IRS Publication 972 – Child Tax Credit if they wish to claim this credit.

Step 4: Other Withholding Adjustments

This section is optional. However, your employees can use it if they want an extra tax withheld or expect to claim other deductions like an upcoming passive income from an investment.

The areas included in this section are:

  • Other income (a): Additional income not earned through jobs – including retirement income and dividends.
  • Deductions (b): This is where employees will indicate itemized deductions that exceed their standard deductions, such as charitable contributions.
  • Extra withholding (c): Any additional withholding your employee prefers to withhold every paycheck.

Step 5: Employee Signs the W4 Form

Make sure your employees sign the form to complete it because it is invalid without their signature. Employees should then submit their completed form to your payroll department or your HR team.

Frequently Asked Questions

Can your employee file W4 exemptions?

It is not illegal for your employees to file as exempt. However, they need to meet these two criteria:

  • They don’t owe any federal income tax in the prior tax year.
  • They expect not to owe any federal income tax in the current year.

However, remember that even if they qualify for a W4 exemption, you still need to make deductions for Social Security and Medicare.

Can you change your employee’s federal withholding without their consent?

No, you cannot change your employee’s federal withholding without their consent, except if you receive a letter from the IRS to do so. In this case, your employee will also receive a copy of the letter from the revenue service. If your employee submits a new Form W-4, you can change the federal withholding based on the changes from the new document.

Can you fill out a W4 form on behalf of your employee?

It is illegal for employers to fill out or complete an employee’s W4 form. No matter how frustrated or desperate your payroll manager is to comply with labor laws, it would be best if you never did this. You are, however, protected by the law to withhold federal income tax for employees who haven’t submitted their W4 form – treating them as single.

What is the difference between a W2 and a W4?

W2 is mandatory for small business owners and even large enterprises, while a W4 is necessary for every employee. A W4 informs you of the amount you should withhold from your employee’s wages. On the other hand, a W2 lets the IRS know how much your employees earned in the previous year.

Make W4 Filing Easy for Your New Employees

Providing strict guidance while your new employees fill out their W4 is the best way to ensure that they submit it. While you are not allowed to influence any information they enter in the document, you can assist them in filling it out.

Image: Depositphotos Comment ▼

Joshua Sophy Joshua Sophy is the Editor for Small Business Trends and the Head of Content Partnerships. A journalist with 20 years of experience in traditional and online media, he is a member of the Society of Professional Journalists. He founded his own local newspaper, the Pottsville Free Press, covering his hometown.

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