What Do I Do with My Employee's Form W-4?

Employees advise their employer the rate at which they would like to have taxes withheld from their pay by using Form W-4, Employee's Withholding Allowance Certificate.

Once the form has been received, what should an employer do with it? How is the tax computation made, and how long does the W-4 remain in effect?

Employers need to have their employee complete a W-4 as soon as they are hired. The form becomes effective with the first payroll period for that employee.

The form is set up with a series of numerical allowances. Each number represents an exemption to taxation. A higher numerical election means less tax will be taken out of the employee's pay. However, the employee can also write-in a dollar amount that they would like withheld each pay-period in addition to the numerical allowances. This is generally done if the employee requests additional taxes withheld over and above the maximum amount available via the numerical elections.

It's not the employer's responsibility to ensure the accuracy of their employee's W-4. Employees are allowed to claim fewer elections than they are legally entitled to, but should not be claiming an overage on legal elections. As an employer, the IRS recommends you direct employees to the IRS Withholding Calculator if they have questions on how to complete their W-4.

Direction can also be given by directing employees to Publication 505, Tax Withholding and Estimated Tax, and Publication 919, How Do I Adjust My Tax Withholding. Employers should familiarize themselves with some of the basic information contained therein so that they can address any employee questions.

At times, an employee may mark the box on the W-4 for a full exemption to federal income tax. This should only be done if the employee had no federal income tax obligations for the previous year, and expects to again have none this year. If your employee only had minimal wages, then this election would lilely be appropriate.

To figure the exact amount that should be deducted from the employee's pay each pay period, use IRS Publication 15, Employer's Tax Guide. Pages 38 through 57 of the 2011 publication have wage bracket tables that will assist you.

Alternatively, you can use a percentage computation by multiplying the amount for one withholding allowance (as given by the IRS in Pub 15, Table 5) by the number of exemptions claimed on the W-4. The resulting figure is the amount subject to tax. You then need to look up the amount of tax from the Pub 15.

A Form W-4 remains in effect until that time that an employee may provide a new one. If an updated W-4 is submitted, act on it for the current pay period and subsequent. It is not a retroactive election.

Keep the W-4 on file. Do not mail it in to the IRS. At times, the IRS may want to inspect the form, if there is a question as to an employee fraudulently completing it in order to defeat tax. Additionally, the IRS has the authority to issue what is called a "Lock-In" Letter. This is done for taxpayers who owe on their tax returns for multiple years due to serious under-withholding and do not voluntary adjust their W-4. The Lock-In Letter trumps any W-4 the employee has filled out prior to or subsequent to the lock-in notice.

More from this Contributor:

Guide to OSHA requirements for small businesses

What are my responsibilities as an employer?

Business tax basics - What taxes will you have to pay?