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
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.
The second page of the form is a considerably more complex
variation of the top portion of the first page, and is intended to assist
employees who itemize their tax returns in determining the correct amount of
their projected withholdings. The page is split into thirds. The top third is
for the use of single filers; the middle third is intended for a household of
two wage earners; and the bottom third is a wage table to be used by households
of two wage earners.
If for some reason the payroll staff has not received a W-4 form
from a new employee as of the date when payroll must be calculated, the IRS
requires payroll to assume the person to be single, with no withholding
allowances. This is the most conservative way to calculate someone's income
taxes, resulting in the largest possible amount of taxes withheld.
A little-known rule is that the IRS requires an employer to
send to it any W-4 forms for employees who may be taking an excessive number of
allowances or who are claiming exemption from withholdings. This is the case
when an existing employee claims more than 10 withholdings, or claims full
exemption from withholding despite earning more than $200 per week. The W-4 form
should be sent to the IRS only if the employees submitting the forms are still
in employment at the end of the quarter. The forms should be sent to the same
IRS office where the corporate Form 941 is filed, along with a cover letter that
identifies the business and notes its Employer Identification Number