Form W-4 is a form filled out by an employee to certify to the employer the personal tax situation of the taxpayer. It is used by employers via the human resources department to fulfill three primary tasks. First, confirm the legal name and address of the employee. Secondly, the form is used to set the federal withholding for tax purposes based on the claimed allowances. Finally, the form is used to vouch the social security number of the employee. To obtain the current 2020 version – Form W-4 – 2020. The following three sections describe these three primary tasks:
Confirmation of Name and Address
You wouldn’t believe how many times I have examined payroll files and come to find out that the employee’s address or name does not match his legal address or legal name. The most common issue relates to the suffix in names. It is all too easy to confuse Senior from Junior in the naming process. Worse yet, imagine a lineage whereby you are dealing with so and so the Fourth!
Another common error is the change of address. These issues pop up when the annual mailing of W-2 forms come back to the employer due to the wrong address. It is imperative to have the correct address. Many employees fail to update the form after moving or just flat out forget to put in the correct apartment number.
As the employer, you need to make sure the address is complete and that the name on the W-4 matches your payroll file name. In addition, compare the name provided to the legal identification document used by the employee, driver’s license or birth certificate. Other identification documents include a social security card, passport, or even a state identification card issued by the Division of Motor Vehicles.
The key to this form is that it acts as a certificate because it is signed by the employee. In effect, the employee is stating on this document his correct legal name and address. If something is wrong on the W-2 or the paycheck, you can use this document as proof that you prepared the reports in accordance with information the employee provided.
Establish the Allowances for Tax Withholding Purposes
As the name of the form states; this form identifies the number of personal allowances (tax withholding thresholds) the employee desires. With each paycheck, the employer withholds federal income taxes from the employee and transfers this amount to the federal government via payroll tax payments. Naturally, the employee will want the withholding to properly match what he needs to pay for the entire calendar year. The employee should not want to withhold too much as this causes less cash in each paycheck and increases the refund amount upon filing the tax return. On the flip side, not enough withholding forces the employee to pay taxes when (s)he files their annual Form 1040. If the employee fails to meet a minimum payment amount, they are subject to tax penalties.
Most employees desire to have more withheld so they may receive a larger refund at tax time, kind of like a forced savings account. This way they can purchase large ticket items with their refund checks. I don’t encourage this as this subjects the employee to possible cash shortages between paychecks. As the employer, you should monitor this allowance number and educate the employee. Most importantly, remind them of their obligation to withhold the proper amount.
If the employee is single and has no children, then an allowance of one is adequate. Most folks place a ‘Zero’ in the block 5 to have additional withholding so they can receive a higher refund each year. Those that are married and/or have children, it gets a little more complicated. This is why the ‘Personal Allowances Worksheet’ exists just above the form’s document zone containing lines 1 through 10. The worksheet is designed to help the employee (taxpayer) calculate the appropriate allowance number. Remember, as this number increases, the withholding from each paycheck decreases.
WARNING: If the employee places an allowance number of 9 or more in the block 5, you should ask questions. The Internal Revenue Service requires due diligence from employers when it appears an employee is deliberately avoiding paying taxes. However, you are not required to submit the W-4 to the IRS for confirmation. This Form is an affirmation from the employee to the employer of his/her tax status. Your job is to provide guidance and remind the employee of their tax obligation. At year end with the filing of the W-2’s, if the IRS considers a particular employee to have inadequate withholdings, they will send you a ‘Lock-In’ letter which basically directs you to set the employee’s allowances to a certain number. The only way to change this allowance amount is with a release letter from the IRS. The employee may not submit a new W-4 without permission from the IRS.
Overall, remember what this is about, the employee is telling you how much to withhold. Your job is to provide some guidance to them. If they state they had to pay taxes at year end with the filing of the return, then the employee should increase their respective withholding by REDUCING the number of allowances. The lower the allowance number, the more withholding of taxes with each paycheck. Here are some of my general guidance suggestions:
- For single Dads without the child in their household, stick to a ONE or ZERO. In general, the mother gets the child as the dependent for her tax return (this is the most common form of parental outcomes in divorce).
- For mothers with children and there is a lack of support from the father, then usually the mother will receive Earned Income Credit when filing the tax return. She should consider having her allowances set to equal her personal allowance plus the number of children in her household. This keeps her withholding low and puts more money into her paycheck.
- For young singles with no children, a ZERO or ONE is appropriate and most common.
- For your standard married employee with children, I suggest the total number of household members less one as this will get the taxpayer closest to the actual tax amount due.
- If wages are expected to be higher than $75,000 per year, in general decrease the allowance calculation by one.
Remember, no matter what; only provide guidance to the employee as to their allowance calculation. Page 2 of the form provides more detail calculations as the marital status and income levels increase or other issues complicate the situation (multiple earners, more than one job, additional dependents in the household such as a parent, etc.).
Vouch the Social Security Number of the Employee
The final purpose of the form is to verify the social security number. The number placed in box 2 should match the social security card provided by the employee. If it doesn’t, you have a problem. Now you will need to take additional steps to confirm the social security number of the employee. Remind the employee that their signature on the form attests to the information provided. Any incorrect information is grounds for financial penalties from the IRS.
In my entire accounting career, I have only seen this once, and it was a simple transposition error. Upon review by the employee, she realized that she transcribed her number incorrectly and filled out a new W-4.
If you need to confirm the social security number, go the Social Security’s number verification service: http://www.socialsecurity.gov/employer/ssnv.htm.
Summary – Form W-4
The Employee’s Withholding Allowance Certificate Form W-4 provides three important pieces of information. First, the employee’s legal name and address is documented. Secondly, the number of allowances for tax withholding purposes is calculated and finally the social security number is presented. Your job as the employer is to have all new employees fill out this form and whenever a financial or social change (marriage, child birth, or a parent moves into the house) the employee should update this form. Have your employees refile the form annually in order to keep up with any possible changes and this provides the employee opportunities to ask questions.
Finally, employees are not allowed to modify the form itself. If they scratch out a section or ignore a section, you are not required to accept the document. Actually you are required to have the employee fill out a new form. Remember, they are certifying their personal status via this form. Act on Knowledge.