W-4 Form

When an employee is hired, he or she is required by law to fill out a W-4 form, which can be done either on paper or in an electronic format. An employee uses this form to notify the payroll staff of his or her marital status and the number of allowances to be taken; this information has a direct impact on the amount of income taxes withheld from the employee's pay. The form is readily available in Adobe Acrobat form through the Internal Revenue Service's web site. An example is shown in Exhibit 7.1.

Exhibit 7.1: Form W-4

There are two pages associated with the Form W-4. In the middle of the first page is a personal allowances worksheet; the actual form is at the bottom. The second page is used only by those taxpayers who plan to itemize their deductions, claim certain credits, or claim adjustments to income on their next tax return.

On the first page of the form, an employee generally should accumulate one allowance for him- or herself, another for a working spouse, and one for each dependent. Additional allowances can be taken for "head of household" status or for certain amounts of child or dependent care expenses. The total of these allowances is then entered on line 5 of the form at the bottom of the page, along with any additional amounts that an employee may want to withhold from his or her pay-check. (Note: They cannot base withholdings on a fixed dollar amount or percentage, but they can add fixed withholding amounts to withholdings that are based on their marital status and number of allowances.) An employee can also claim exemption from tax withholding on line 7 of the form. This lower portion of the form should be filled out, signed, and kept on file every time an employee wants to change the amount of an allowance or additional withholding, in order to maintain a clear and indisputable record of changes to the employee's withholdings.

If an employee has claimed exemption from all income taxes on line 7 of the form, this claim is only good for one calendar year, after which a new claim must be made on a new W-4 form. If an employee making this claim has not filed a new W-4 by February 15 of the next year, the payroll staff is required to begin withholding income taxes on the assumption that the person is single and has no withholding allowances.

TIPS & TECHNIQUES

Employees who claim complete exemption from federal tax withholdings on their W-4 forms must file a new form each year, or else be liable for withholding that equates to a single marital status and zero allowances. Employees probably will not know about this refiling requirement, so the payroll department should send them periodic reminders. This can be time-consuming, since W-4 forms are usually buried in an employee's payroll file and are not reviewed regularly. One approach is to create a "tickler" file containing copies of only those W-4 forms that must be replaced regularly; and make a notation on the departmental activities calendar to review the tickler file on specific dates. Another solution is to set up a meeting date in an electronic planner (such as Microsoft Outlook) that will issue an alert on the user's computer to review this issue on specific dates. The meeting alert can even be sent automatically to those people who are required to complete new W-4 forms, though you must be sure they must have ready access to a computer to receive this warning.