How to Explain a W-4 to Your Employees
When you hire a new employee, they’ll have to fill out a W-4, Employee’s Withholding Allowance Certificate. It’s important for you to understand a W-4 to answer any questions your employees may have.
The W-4 indicates how much federal income tax you’ll withhold from each employee’s paycheck.
What Should My Employees Know?
To begin, each employee will fill out the “Personal Allowances Worksheet” on page 1 of their W-4. The more allowances an employee claims, the less income tax you’ll withhold and the more money will go directly to your employee.
If an employee doesn’t claim all their allowances, then you’ll withhold more income tax than they’re required to pay. They’ll also receive a larger refund when they file their tax return. Some employees like to receive that larger refund and will purposely claim fewer allowances. Doing this is like giving the government an interest-free loan. However, if an employee claims too many allowances, they may owe a large amount when they file their tax return.
If your employee plans on itemizing their deductions, they’ll complete the “Deductions and Adjustments Worksheet” on page 2. After they’ve completed the worksheet, they’ll either complete the “Two-Earners/Multiple Jobs Worksheet” or enter the total from Line 10 on page 1, line 5.
If your employee has a working spouse or works two jobs, they’ll need to complete the “Two-Earners/Multiple Jobs Worksheet” on page 2. Your employee should enter the amount from Line 3 on page 1, line 5 and the amount from Line 9 on page 1, line 6.
After your employee has completed the necessary worksheets, they can finish completing page 1. They’ll enter their name, address, and social security number. They’ll check a box on line 3 indicating whether they’re single, married, or married but withholding at the higher single rate. They may choose the higher single rate if both spouses work and they want to make sure they’re withholding enough.
If your employee is exempt from federal income tax, they’ll write “Exempt” on Line 7. They’re exempt if they had a right to a refund for all their federal income tax the previous year because they had no tax liability and if they expect a full refund this year because they expect to have no tax liability. If someone can claim your employee as a dependent and your employee’s income exceeds $1,000, they can’t claim exempt.
What Do I Need to Know?
After your employee has completed and signed the form, they’ll turn it in to you. You only file a W-4 if the IRS notifies you in writing that you must file. Although you don’t have to file W-4 forms, you’re required to keep them to verify that you’re withholding the correct amount and in case the IRS requests them later.
After your new employee has given you their completed form, you can determine the amount you need to withhold using withholding tables, or you can enter the claimed allowances into your payroll system, which will automatically determine the amount to withhold.
If an employee doesn’t turn in their W-4, withhold at the highest tax bracket of the single status with 0 allowances. Once they’ve turned in the form, you can adjust their withholding amount based on the form.
Each new employee must fill out a W-4, but they should complete a new form whenever their situation changes. When they get married or have a child, they should fill out a new W-4. You should also encourage your employees to review their forms annually.
