As an employer, you need to withhold income taxes from your employee’s earnings each pay period. But how do you know how much to withhold?
Form W-4 gives you the information you need to ensure accurate withholding for each of your employees. But Form W-4 went through some changes back in 2020—and your employees may have questions about how to fill it out.
Let’s take a deep dive into the W-4 form: what it is, why it’s important, and how your employees can fill it out accurately:
What is a W-4 form?
Here’s how it works: an employer gives Form W-4 to the employee. The employee determines how much they want withheld from their earnings, fills out the form accordingly, and gives it back to the employer. The employer then uses that to determine the tax withholding for that employee and deducts the appropriate amount each pay period.
All new employees have to fill out a W4 form when they’re hired—and if they want to change their withholdings, they can resubmit a new W4 form at any time.
Why is form W4 important for employees and for employers?
From an employee perspective, Form W-4 allows your team to control the amount of income tax that’s withheld from their paychecks. That can help employees avoid underpaying (which can result in a huge bill come tax time) or overpaying on their taxes (which can leave them with less take-home pay throughout the year than they’re entitled). Employees can also see how much is being withheld from their earnings on their pay stub—and again, if they want to adjust their withholdings in either direction (and have more or less withheld), they can resubmit a new form at any time.
As an employer, not only does having an up-to-date W-4 for each employee help you determine how much to withhold each paycheck, but you also want to have them on file for tax purposes. While you’re no longer required to routinely submit W4 forms to the Internal Revenue Service, they reserve the right to request “copies of Forms W-4 for certain employees in order to ensure that the employees have adequate withholding.” So, if the IRS comes knocking, you definitely want to have the copies they’re requesting.
Form W-4 changes for 2020 (that still apply today)
In 2020, the IRS released a new Form W-4 for 2020 with two key changes. The first is the form’s title. Form W-4 used to be titled “Employee’s Withholding Allowance Certificate.” But in 2020, that title was shortened to “Employee’s Withholding Certificate.”
And that title shortening is a result of the other key change to Form W-4. Prior to 2020, employees used W-4 to claim withholding allowances. The number of allowances determined how much income tax was withheld from each paycheck; employees who claimed fewer allowances had more tax withheld from each paycheck, while employees who claimed more allowances had less tax withheld each pay period. The value of these allowances were, in part, based on personal exemptions.
But a 2017 tax bill, the Tax Cut and Jobs Act, eliminated personal exemptions—and so Form W-4 also eliminated allowances. Now, instead of employees figuring out the right withholding allowances (which proved confusing for many), the new Form W-4 has employees fill in the relevant information to determine accurate tax withholding (like filing status, number of dependents, and additional income)—and then the employer does the calculations from there.
How to fill out a W4 form
Now that you understand what a W-4 form is, why it’s important, and the changes that were made to it in 2020, let’s jump into how to fill it out. That way, you can guide your workers through the process—and make sure you have the information you need to accurately calculate their tax withholdings.
All employees must complete steps 1 and 5 on Form W-4. Steps 2, 3, and 4 only need to be filled out if they apply to the employee. Note: only employees hired in 2020 and beyond need to fill out the revised Form W-4. Employees hired prior to 2020 will have their withholdings computed based on their most recent Form W-4.
Step 1: Personal Information
Any employee filling out Form W-4 will need to fill in their personal information, including:
- First name and middle initial
- Last name
- Social security number
- Filing Status: Single or Married and filing separately, Married and filing jointly, or Head of Household
Step 2: Multiple Jobs or Spouse Works
If an employee has more than one job or they’re married filing jointly and have a working spouse, they’ll need to fill out step 2.
If your employee works other multiple jobs, they would check the box next to section 2(c) and complete the Multiple Jobs Worksheet. Depending on the number of jobs the employee and/or spouse holds, they can fill out the worksheet as follows:
If the employee has two jobs or they’re married filing jointly and their spouse also has a job, the employee should fill in Line 1 of the worksheet by using the withholding tables on page 4 of Form W-4, which have columns for the highest paying job on the left and the lowest paying job on the right. Employees should find their wages, cross reference the highest and lowest paying jobs, and enter the number at the intersection into Line 1.
If the employee and their spouse have three total jobs, the employee will need to fill out Line 2a, 2b, and 2c on Form W-4.
Using the same process as we just covered for Line 1, employees should cross reference their highest paying job and second highest paying job and enter the number at the intersection into Line 2a.
Then, they should add the wages from the two jobs from Line 2a and use them as the “Highest Paying Job,” cross reference with their wages and salary from their third job, and enter the number at the intersection into Line 2b.
The employee should add Line 2a and Line 2b and enter the total on Line 2c.
Once an employee has completed Line 2, they can move on to the rest of the worksheet. Just keep in mind that while employees should fill out a W-4 form for each of their jobs, they should only complete steps 3 through 4(b) for their highest paying job (they can leave those sections blank on their other W-4 forms).
Step 3: Claim Dependents
If an employee has dependents, they’ll need to complete Step 3, which determines their eligibility for the child tax credit.
Any employee filing single with an income of $200,000 or less—or an employee that’s married filing jointly with a combined income of $400,000 or less—can claim dependents on Form W-4.
If employees have children under the age of 17, they should multiply the number of children by $2000 and enter it into the first box on the worksheet. For all other dependents, they should multiply by $500 and enter into the second box. Then, they should add the values from the first and the second boxes and enter the total into Line 3.
Step 4: Other Adjustments
Step 4 is for any other adjustments your employee would like to make to their federal income tax withholding.
There are three sections employees can choose to fill out under step 4, which include:
- Line 4a: Other income (not from jobs). If your employee has additional income that isn’t subject to withholding (including interest, dividends, and retirement income), they can enter that income on Line 4a and elect to have the additional amount withheld from their earnings to compensate.
- Line 4b: Deductions. If your employee expects their deductions to exceed the standard deduction, they would fill out the Deductions Worksheet on page 3 of Form W-4 and enter the result on Line 4b.
- Line 4c: Extra withholding. If your employee wants to have additional tax withheld each pay period, they can enter the withholding amount on Line 4c.
Step 5: Sign the form
Form W-4 is only valid if it’s signed and dated by the employee. Make sure your employee both signs and dates their W-4 form before submitting it to management or human resources.
Understanding Form W-4 helps your employees better manage their tax situation
Filling out Form W-4 can be confusing for your employees. But now that you have a better understanding of Form W-4 and the changes made to it back in 2020, you can walk your employees through the process, help them better understand how to accurately fill out the form, and ensure they’re having the right amount of income tax withheld from their paychecks.