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Form W-4 Basics and Recent Changes under Tax Reform

Payroll
Article
03/29/2018

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 new tax law made significant changes to tax rates and other rules that affect the taxes that individuals will pay for 2018. The IRS released revised withholding tables for 2018 reflecting the new rates. The new tables are designed to work with existing W-4s; employees do not have to complete a new Form W-4. However, some employees may want to do so.

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 for 2018 can be claimed if:

  • An employee had a right to a refund of all federal income taxes withheld for 2017, and
  • He or she expects to have no tax liability for 2018.

Generally, a new W-4 for exemption purposes must be filed no later than Feb. 15 for the year of exemption. However, because the IRS did not issue a revised Form W-4 for 2018 until Feb. 27, 2018, the IRS allows employers to treat forms signed in 2017 to be effective for exemption from withholding through Feb. 28, 2018. The 2017 Forms W-4 claiming exemption from withholding for 2017 are not effective for wage payments made after Feb. 28, 2018. And the IRS has allowed employees to claim exemption using the 2017 Form W-4 until 30 days after the 2018 Form W-4 is released (i.e., March 27, 2018) by modifying the 2017 version.

Looking ahead

While there are changes for 2018, expect more in 2019, including changes involving withholding. The IRS said that it will work with the business and payroll community to encourage workers to file new Forms W-4 next year and share information on changes in the new tax law that impact withholding.

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

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. She has been named a Small Business Influencer for five years in a row.

This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.
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