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Form W-4 Basics

Payroll
Article
07/11/2019

Update: The IRS has released a draft Form W-4 for 2019. Get details here.

Form W-4, Employee's Withholding Allowance Certificate, is used by employees to indicate their marital status (single, married, married but withhold at a higher single rate) and to determine the number of withholding allowances. This enables employers to withhold the correct amount of federal income tax from workers’ pay.

What is the Form W-4?

Form W-4 is a four-page form comprised of the withholding allowance certificate, worksheets, and instructions. Here are some facts about this form:

  • It should be completed by a new employee. Usually no new form is required annually (but see below when a new form may be desirable).
  • If no form is completed, an employer figures withholding as if the employee is single claiming no withholding allowances. This occurs regardless of the employee’s marital status.
  • The withholding certificate has no impact on FICA taxes. The employer withholds the employee share of FICA based on the amount wages subject to this tax even if an employee is exempt from income tax withholding.
  • Employers are not required to routinely submit Forms W-4 to the IRS. But they should retain the forms and other records of employment taxes for at least four years after filing the fourth quarter for the year.

Impact of tax reform on the Form W-4

The 2018 tax law made significant changes to tax rates and other rules that affected the taxes that individuals paid for 2018. The IRS released revised withholding tables for 2018 that reflected the new rates. The tables were designed to work with existing W-4; employees did not have to complete new Form W-4. The 2019 W-4 remains largely consistent with the 2018 W-4, absent adjustments for inflation.

Revised W-4

Employees are free to submit a revised W-4 form at any time during the year and an employer must put it into effect no later than the start of the first payroll period ending on or after the thirtieth day from the date the revised form is received. Submitting a revised W-4 form may be appropriate in these situations:

  • There's a change in filing status (i.e., an employee gets married or divorced, or becomes a head of household).
  • There's a change in the number of dependents for whom a child tax credit can be claimed.
  • A spouse enters or leaves the workforce.

Also, an employee who has a big capital gain or other sizable amount of income that's not otherwise subject to withholding and hasn't factored the tax on this income into his or her withholding allowances may want to cover the resulting tax bill by an additional amount of withholding. By filing a new Form W-4, an employee can specify a specified dollar amount of taxes to be withheld.

Exemption from withholding

If an employee wants to claim exemption from all income tax withholding, Form W-4 must be completed annually. Eligibility for exemption can be claimed if:

  • An employee had a right to a refund of all federal income taxes withheld, and
  • He or she expects to have no tax liability.

Generally, a new W-4 for exemption purposes must be filed no later than Feb. 15 for the year of exemption. 

Looking ahead

The IRS released a draft of a new Form W-4 and following feedback from the payroll and tax communities, the Treasury Department and the IRS have postponed a release of substantial changes to the W-4, Employee’s Withholding Allowance Certificate, which was originally anticipated for 2019. The IRS will work closely with stakeholders to make more substantive adjustments to the 2020 W-4 that will accurately reflect the changes encompassed in the new tax law. In the interim, the IRS strongly encourages taxpayers to review their withholding situation using the paycheck checkup to ensure withholding is not under- or over-withheld.

Conclusion

Employers can offer employees the option of completing W-4s by paper or electronically. They can also suggest that employees use the IRS withholding calculator to help them determine their optimum withholding allowances.

Barbara Weltman is a tax and business attorney and the author of J.K. Lasser's Tax Deductions for Small Business as well as 25 other small business books.
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