Blank Form W-4, Employee’s Withholding Certificate, beside a calculator and glasses

An Employer’s Guide to Form W-4

This article was last edited on 8/10/2020. For updated information on Form W-4, visit https://www.irs.gov/forms-pubs/about-form-w-4

Form W-4, Employee’s Withholding Certificate, must be completed by workers in the U.S. to tell their employers how much federal income tax to withhold from each paycheck.

At a glance:

What changed in 2020?

In January 2020, the IRS released a new Form W-4 to comply with the Tax Cuts and Jobs Act. The latest version is significantly different than previous ones and is intended to be simpler for taxpayers to complete. It also increases the accuracy of federal tax withholdings.

In particular, the following three things have changed:

  1. No more withholding allowances – Previously, withholding allowances were used to account for additional income, deductions, and tax credits and corresponded to the personal exemption amount. Since there’s no longer a personal exemption, there are no more withholding allowances. Instead, taxpayers will enter any additional income they expect to earn and indicate any deductions and tax credits they plan to claim.
  2. More straightforward design – Although the updated form essentially asks for the same information as previous versions, it has replaced complicated worksheets with simple questions. It’s also now divided into five easy steps.
  3. Only two steps are required – Each employee only has to fill out the first and last step on the W-4. If they do that, their withholdings will be based on the standard deduction amount and tax rates with no other adjustments.

Since the current version is drastically different from previous years, make sure your staff knows that the new form exists, so they can update their withholding info if they want to. And clearly communicate these changes to your team to reduce stress.

When do new employees have to fill out a W-4?

When you hire a new W-2 employee, you’ll need to collect their W-4 before issuing their first paycheck to ensure you’re withholding the right amount in federal income taxes.

If someone doesn’t give you the form, you’ll treat their withholdings as if they marked the box for “Single or Married filing separately” in Step 1 and did not enter anything in Steps 2-4. If you hired someone in 2019 who didn’t turn in a W-4, withhold federal income tax like they’re filing Single and claiming zero allowances.

How often can someone update their withholding info?

A worker can update their withholding info whenever they like, as often as they like.

It’s common for someone to update their W-4 after a significant life event – like getting married or divorced or having or adopting a baby.

They may also choose to change their withholding info if they

  • received a large refund from the IRS and want you to withhold less each paycheck
  • owed the IRS money and want you to withhold more

When does an updated form go into effect?

If an employee updates their form, you must put it into effect by the start of the first pay period ending on or after the 30th day from when you received it.

Example: You pay a staff member every Friday and they give you a new W-4 on September 2. You must start using their new form by the October 2 payroll (although, you can always implement it earlier than that). If you use payroll software like Workful, your worker can enter their updated withholding info online to be implemented immediately.

Read also: 3 Ways Self-Service Technology Benefits Your Small Business

Can an employee be exempt from federal income tax?

Yes, someone can claim they’re exempt from federal income tax if they meet the following criteria:

  • had no tax liability last year and received a refund of all their federal income tax withholdings
  • expect a refund of all their federal withholdings because they will have no tax liability this year

If they’re exempt, you will not withhold federal income tax from their paychecks. But you will still withhold Social Security, Medicare, state, and local taxes.

If a worker has determined that they’re exempt, they’ll complete Steps 1(a), 1(b), and 5 on Form W-4. They will also write “exempt” in the space below Step 4(c) but will not fill out any other info.

It’s important to note that they’ll need to submit a new form by February 15 every year to continue claiming the exemption. If they don’t give you a new copy by February 15, start withholding federal income tax from their paychecks.

Read also: Tax Due Dates

Do workers have to fill out the newest version of the W-4?

No, you don’t need to have your existing staff members fill out a new W-4 just because there’s a more recent version. They’ll only need to use the latest version if you just hired them or if they want to update their withholding info.

Because your team may be using multiple versions, the IRS has designed withholding tables to work with the updated W-4 and previous years’ forms.

Read also: How to Calculate Payroll Taxes