Here at Employers Council, we get questions about employee W-4s and employers’ responsibility for making sure they are accurate. Below is a list of the most common questions we get. This is not 100 percent of the W-4 issues employers run into. For more information on the employer’s side of W-4s, see the IRS Publication 15, also known as the Circular E.
The first thing to know and remember is that the employer should never insert themselves in this process. This form is unique to each individual, and employers that give advice could be setting themselves up for liability if the employee discovers they completed the form incorrectly based on the employer’s advice. As much as you want to be helpful, your best course of action is to just point your employees to the instructions and advise them to speak to a tax adviser or the IRS if they have questions or are confused.
What withholding allowances is an employee entitled to claim?
The Form W-4 has specific instructions on how to figure out the number of allowances someone can claim. When you give a W-4 to an employee, it should always include the instruction pages to help them make the best choices.
What do I do with an invalid W-4?
You are not responsible for verifying the number of withholding allowances to which an employee is entitled, but a W-4 is invalid if the employee indicates to you in writing or verbally that any of the information contained on the form is false, if you are aware that the form is fraudulent, or if the form has been improperly completed or modified. This includes taking out any language by which the employee certifies the form is correct.
A W-4 is also invalid if you are aware that any of the information contained on the form is false. The IRS has stated that an employer should know that a W-4 is invalid on its face when it represents a sudden dramatic departure from the employee’s prior withholding. You are thus put in the somewhat awkward position of having to make judgment calls about the validity of W-4s. Therefore, you should be wary of unusual W-4 requests, as you could be liable for penalties and interest on the taxes that should have been withheld and reported.
When you get an invalid Form W-4, don’t use it to figure federal income tax withholding. Tell the employee it is invalid and ask for another one. If the employee doesn’t give you a valid one, withhold tax as if the employee is single with zero withholding allowances. However, if you have an earlier Form W-4 for the worker that is valid, withhold as you did before.
What is the penalty to the employee for filing a false W-4?
An employee who claims more allowances on the W-4 than they are entitled to may face a civil penalty of $500.
What is a lock-in letter?
The Internal Revenue Service (IRS) may notify you in writing that the employee is not entitled to claim exempt from withholding or a number of allowances greater than the maximum number specified in the notice (commonly referred to as a “lock-in letter”). The letter will also specify the employee’s marital status for purposes of calculating the required amount of withholding.
You’ll also receive a copy for the employee that identifies the maximum number of withholding allowances and marital status permitted and the process by which the employee can provide additional information to the IRS for purposes of determining the appropriate number of withholding allowances and/or modifying the specified marital status. You must furnish the employee copy to the employee within 10 business days of receipt if you employ the employee as of the date of the notice. Begin withholding based on the notice on the date specified in the notice.
When you receive the notice specifying the maximum number of withholding allowances and marital status permitted, you may not withhold immediately on the basis of the notice. You must begin withholding tax on the basis of the notice for any wages paid after the date specified in the notice. The delay between your receipt of the notice and the date to begin the withholding on the basis of the notice gives the employee time to contact the IRS.
My employee asked for advice regarding how many allowances they should withhold or claim on the W-4. Should I give them my advice?
Employers should advise employees to complete the worksheet, and if they still have questions, to ask their tax adviser how many allowances they should claim on the W-4. Employers should inform employees that HR/payroll personnel are not tax advisers.
When can an employee claim to be exempt from withholding?
In order to be exempt, the employee must certify that they meet BOTH of the following criteria:
- Had a right to a refund of all federal income tax withheld in the previous tax year because the employee had no tax liability; and
- Expects to have no tax liability in the current year.
High school and college students are not automatically exempt from withholding, even if their prior year’s withholding was totally refunded. They must meet all of the tests for exemption that other employees are required to meet.
A claim of exemption from withholding is effective for one year, and a new W-4 attesting to the exempt status must be filed by the date published by the IRS each year. Generally, it is close to mid-February of each year. If you do not receive a new W-4 for the current tax year by the expiration date, begin withholding based on the last Form W-4 for the employee that didn’t claim an exemption from withholding or, if one wasn’t furnished, then withhold tax as if they are single with zero withholding allowances. If the employee provides a new Form W-4 claiming exemption from withholding on February 16 or later, you may apply it to future wages, but don’t refund any taxes withheld while the exempt status wasn’t in place.
If the employee is claiming more than 10 allowances or is exempt from withholding, do I need to submit the W-4 to the IRS?
No. The IRS changed this procedure in April 2005 and finalized it in July 2007. However, you must submit a copy of the W-4 if the IRS directs you to in a written notice, or the IRS directs you to in published guidance, such as a revenue procedure.
A notice from the IRS may direct you to submit copies of W-4s for one or more named employees, for all employees in a department or other business unit, or where the W-4s meet certain criteria specified in the notice. As an alternative, the IRS can send a tax examiner to visit your work site to examine the W-4s and require you to make them available.
Watch out for state laws. Many states continue to require employers to submit the W-4 to the state taxing authority if a certain number of allowances or an exemption from withholding is claimed.
In Colorado, an employer must file with the Department of Revenue any W-4 for any employee who is expected to earn more than $200 per week and who lists more than 10 withholding allowances or an exempt status. Additionally, these W-4 forms shall include a cover letter listing the employer name, address, FEIN, and the number of Withholding Allowance Certificates included. The Colorado Department of Revenue will contact you should it be determined that the requested exemptions must be modified. Withholding Allowance Certificates should be mailed to:
Colorado Department of Revenue
Discovery Section Room 634
PO Box 17087
Denver, CO 80217-0087
In California, the Franchise Tax Board or the Employment Development Department (EDD) may, by special direction in writing, require an employer to submit a Form W-4 or DE 4 when such forms are necessary for the administration of the withholding tax programs.
Arizona and Utah do not require employers to submit W-4 allowances.
An employee submitted a new W-4 and made it retroactive. Do I have to go back and recalculate the withholding on the employee’s prior paychecks?
An amended W-4 filed by a current employee because of a change in withholding allowances must be put into effect by the employer no later than the beginning of the first payroll period ending on or after the 30th day after the form is filed with the employer. The employer MAY put an amended W-4 into effect earlier than required (e.g., upon receipt), but is not obligated to honor a retroactively amended W-4.
How long must I keep a W-4?
You must retain each employee’s W-4 for at least four years after the date the last return was filed using the information on the W-4.
Are there any states that require a separate tax form for state income taxes?
Yes. Several states require a state tax-withholding form in addition to the federal W-4. For example, Arizona requires a form A-4 and California has a form DE-4. Utah and Colorado use only a federal form W-4.
While we shouldn’t be tax advisers, nor should we help employees complete their forms, it is important to know our obligations as employers. Hopefully this information will get you started. For detailed interpretation, consult your CPA or a tax attorney with payroll expertise.