One of the first requirements of hiring a new employee is obtaining a specialized form to determine how much income tax to withhold. IRS Form W-4 is used to calculate federal withholding. Employers can ensure that their payroll withholding is accurate by obtaining a completed Form W-4 from each new employee.
After explaining the purpose of Form W-4, allow new employees an adequate amount of time to read over the contents of the form. After completion, visually inspect the form to ensure that the new employee has signed and dated it in the designated spaces.
Form W-4 itself is relatively brief, but it has three potential supporting worksheets. Unless the new employee is single with no dependents, the worksheets are essential to provide additional accuracy to the form. The worksheets are intended to account for circumstances encountered on actual income tax returns.
Personal allowances worksheet
A common misconception about tax withholding is that the number of allowances on Form W-4 is the same as the number of persons claimed on a tax return. Actually, the number of withholding allowances on Form W-4 also entails a few additional aspects of a tax return. Extra allowances may be added if your employee qualifies for any of the following:
- Filing as head of household
- Claiming a credit for child care expenses
- Receiving the child tax credit
Deductions and adjustments worksheet
If a new employee plans to itemize deductions on their tax return, a separate worksheet is available. Any additional allowances for itemized deductions are added to the number of personal allowances, and the total is entered on Form W-4.
Worksheet for two earners or multiple jobs
A third worksheet is available to more accurately calculate withholding for two married persons who both work. The same worksheet may be used for a single individual who holds more than one job. Instead of an extra allowance, an additional amount is calculated to be withheld each pay period.
Form W-4 also provides an option for a qualified employee to opt out of tax withholding for the current year. The exemption is only for federal income tax, so Social Security tax and Medicare tax is still withheld. Both of the following conditions must apply for an employee to claim an exemption from federal income tax:
- There was no federal income tax paid last year
- No federal income tax is expected to be paid for the current year
Payroll preparation is an essential function, but it is not your central business focus. In fact, the expertise of an accountant is likely to prevent penalties and save money. Contact an accountant, like Blueback Accounting, for more information on payroll processing for your business.