I’m diving into Form W-4, a critical piece of the payroll process that determines how much federal income tax you should withhold from an employee’s paycheck.
Let’s break it down in a clear, simple way.
What Is Form W-4?
Form W-4, officially known as the Employee’s Withholding Certificate, is completed by your employee when they start working for you. This form tells you:
- Their filing status (Single, Married Filing Jointly, etc.)
- Whether they have additional income or deductions
- If they want extra tax withheld from each paycheck
The information provided on the W-4 helps you calculate the correct amount of federal income tax to withhold.
What If an Employee Doesn’t Submit a W-4?
If an employee doesn’t provide you with a completed Form W-4, the IRS requires you to withhold taxes as if they were single with no adjustments. This generally results in a higher withholding amount, so it’s in the employee’s best interest to complete the form properly.
What About Claiming Exempt?
Some employees may wish to claim an exemption from federal income tax withholding. Here’s what they need to know:
- They must have had no tax liability in the previous year.
- They must expect to have no tax liability this year.
- The exemption is only valid for one calendar year.
- To stay exempt, they must submit a new Form W-4 by February 15 each year.
If the employee fails to provide an updated form, you must revert to withholding as if they are single with no adjustments.
What Is a Lock-In Letter?
Sometimes, the IRS determines that an employee is under-withholding federal taxes. When that happens, they send you a lock-in letter with specific instructions on how to calculate withholding for that employee.
Key points about lock-in letters:
- You must follow the IRS instructions, even if the employee gives you a new W-4.
- If the employee wants to change the withholding, they must work directly with the IRS.
- If you rehire that employee within 12 months of the lock-in date, the same instructions apply.
Final Thoughts
Understanding Form W-4 and how to handle special situations—like exempt status or lock-in letters—is a key part of running compliant, efficient payroll. While it might feel overwhelming at first, these processes become straightforward once you know the rules.
Need Help with Payroll or Withholding?
We’re here to support you. Whether you’re hiring your first employee or expanding your team, our experts can guide you through payroll setup, tax compliance, and everything in between.
Call us at: 310-534-5577
Email: contact@abandp.com
Have a payroll question you’d love answered in a future episode? Send it to: media@abandp.com
