What is Form W-4? What is the use of it?

Employer must complete new hire papers when employer recruit a new employee. Form W-4 is one that employer has to have new hires complete and keep on file. So what does a W-4 form mean? What does the Form W-4 serve? Continue reading to learn the solutions to these and other W-4 queries.

1. Key Points

• Employee's Withholding Certificate, Form W-4, is an IRS document used by employees.
• When the employee begins working, the employee must fill it out and submit it.
• Employers should use a Form W-4 that has been filled out to calculate how much federal income tax (FIT) should be deducted from employee wages.
• An employee may claim credit for dependent kids on Form W-4.
• The dependent credit depends on the age of the dependent.
• Dependents are eligible for a $500 credit if they are over the age of 17 years old and $2000 if they are under 17 years old.
• The need to amend a form may arise from a significant life event for an employee.

2.  What is Form W4

When an employee begins working for an organization, they must complete IRS Form W-4, Employee's Withholding Certificate. Employee must fill up the following information on the form:

1.  Name

2.  Address

3.  Social Security number

4.Filing status (e.g., Single)

5.Multiple job or spouse work information (if applicable)

6.Number of dependents (if applicable)

7.Adjustments (if applicable)

8.Signature

Additionally, the form includes a few worksheets that employees can use to figure out how many jobs they have and what deductions they have made. Depending on the individual employee, some form sections may be skipped (e.g., claiming dependents).

Employers must calculate the amount of federal income tax (FIT) to deduct from employees' paychecks based on the Form W-4 that the employee has completed.

The IRS Form W-4 is primarily filled out by the employee, although there is a minor section at the bottom that employers must complete. Employers must fill out the form with the following details:

1. Employer’s name and address
2. Employee’s first date of employment
3. Employer Identification Number (EIN)

3. What is the use of Form W-4?

A Form W-4 is used to calculate the amount of federal income tax that will be withheld from an employee's paycheck. The form is filled up by employees using the worksheets and tables. Employer will utilize the form to determine the employee's FIT withholding after that.

Employers need to use the tax tables in IRS Publication 15-T to determine how much Federal Income Tax (FIT) should be deducted from an employee's paycheck. 

Remember that the IRS Publication 15-T contains tax tables that are compatible with W-4 forms from 2019 and prior. Before calculating the employee's withholding, make sure you're using the right tax table.

4. Are you exempt from filing Form W-4?

Some employees may, in exceptional circumstances, be excused from federal income taxes. This means that no federal income tax is deducted from the employee's salary.

The federal income tax exemption is only available to some employees. A worker is exempt if they:

1.Owed no federal income taxes for the prior year.

2. Expect not to owe any federal income taxes this year.

Employees must indicate on Form W-4 that they are exempt from FIT by writing "Exempt" in the box underneath Line 4. (c). On their W-4 form, exempt workers must additionally include their name, address, SSN, and signature.

Remember that the data on Form W-4 never expires. An exemption from withholding, however, does. Employees who claim exemption on Form W-4 must submit a fresh form by February 15 of each year.

Look at IRS Publication 505 and the General Instructions on Form W-4 for more information on exemption from withholding.

5. When is an employee expected to update Form W-4?

The Form W-4 can always be updated by an employee. A significant change in circumstances may need an employee to update their form (e.g., got married or had a baby). They could also elect to modify their W-4 form to change the withholding percentage.

Employees must complete a new Form W-4 if they need to make any changes to their current one.

Employer has a set amount of time to make the modifications after the employee fills out the new form. No later than the paycheck period that ends on or after the 30th day following the date the employer received the updated form, put the modifications into effect.

Wait until the next year to put any modifications into effect if the employee is revising a form for the coming year.

6. What employee need to do to claim Dependents:

Starting from 2020 and later, the form W-4 is changed to claim dependents instead of allowances. 

The new Form W-4, an employee with a dependent child must look at their dependent’s age to determine the amount of the child tax credit and the credit for other dependents that they may be able to claim. Dependents under 17 have a dependent amount of $2,000, while dependents over 17 have a $500 amount.

7. What is the employer's responsibility?

Yes, the majority of Form W-4 is completed by your employees. However, employer has a few Form W-4 obligations as an employer, including:

1. Completing the Form W-4's bottom employer section

2.W-4 data entry in your payroll processing system

3. Immediately after receiving the form, withhold taxes.

4.Maintaining all W-4 documents in your files for a minimum of four years

Employer and employee may occasionally get a letter from the IRS stating that not enough FIT was withheld from the employee's pay. In most cases, the letter gives the employer instructions to withhold federal income tax at a higher rate.

If an employer or employee gets a letter from the IRS, the withholding tax needs to be adjusted within 60 days in accordance with the notice's instructions. Keep in mind, too, that the employee does have the option to challenge or alter their deductions.

Contact Surya Padhi at Sure Financials for any question and clarification. Surya Padhi is an expert who keeps current on tax law changes as well as a member of the National Association of Tax Professionals National Association of Tax Professionals (NATP) and  New Homepage - National Association of Enrolled Agents (naea.org). Visit Welcome | Sure Financials & Tax Services, LLC (surefintaxsvs.com) for more information and contact us by calling +1908.300.9193.

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