UPDATE YOUR FORM W-4 TODAY: All About Form W-4

H & R Block recently reported the results of a survey about IRS Form W-4 - Employee’s Withholding Allowance Certificate, that I found enlightening!

Most of the survey respondents knew very little about Form W-4:

* 47% didn’t know they could update their W-4

* 54% felt unprepared on how to update their W-4

* 81% didn’t update their W-4 after the tax reform

* 52% didn’t know how their W-4 affected their refund

* 58% didn’t know who to give their W-4 to

* 31% didn’t know who to ask for help

To be fair, taxes are complicated, and there are plenty of jokes about socially awkward and “nerdy” accountants (but thankfully, we beat out actuaries). However, it’s important that every employee understands how this form affects their taxes.

So, what’s a W-4 used for? What most people don’t know is that an employer cannot deduct anything from an employee’s paycheck unless it is legally obligated, or specifically authorized by the employee. That means, if an employee accepts a job for $20 per hour, and works 40 hours, her net paycheck should be $800, unless she has authorized deductions, or there are legally obligated deductions.

Legally Obligated Deductions (no employee authorization required)

* Social Security/Medicare withholding

* Garnishments (tax debt, child support, medical debt, utility debt…)

Employee Authorized Deductions (signed employee authorization required)

* Federal/state tax withholding

* Direct deposit

* Employee benefits (health, retirement…)

* Employer reimbursements (uniforms, tools, loans…)

This means an employer is not responsible for withholding federal or state income taxes from an employee’s paycheck, unless specifically authorized by the employee. As an employer, have you ever heard the following from an upset employee (in March or April)?

“I owe money on my tax return. You didn’t withhold enough from my paychecks!”

Rest assured, if you have a completed W-4 from the employee, and you withheld taxes based on that W-4, you’re in the clear. You’ve done everything obligated of you. The employee is at fault for not having enough withheld from her paycheck, based on her W-4 form.

A W-4 has 7 fields that must be completed by an employee (6 of which are merely name, address, and marital status fields). The seventh field is the most important field on a W-4. The “exemptions” field tells the employer how much to withhold in federal/state income taxes.

To properly calculate the number of exemptions on a W-4, the IRS has always included a simple 6 step worksheet with a W-4. The worksheet, written for the minimally educated, requires the employee to; enter a “1” for the employee, a “1”, for a spouse (if married, and a “1” for each dependent the employee will claim on the employee’s tax return. Then the worksheet requires the employee to add these numbers together, to get the number of “Exemptions” to enter in the final field of the W-4.

The IRS anticipated that many Americans would not complete new W-4s after the tax reform. In order to minimize tax issues, they adjusted tax withholding tables to reflect the tax changes. Even so, as an employer, you may hear from some disgruntled employees during the coming months. So, here is an action plan to avoid future withholding issues based on the H & R Block survey”:

* Provide all employees with a new W-4 every year

* Inform employees they can update their W-4s at anytime

* Ensure employees understand the instructions.

Do you need help with human resources or payroll problems? Contact ARI, we can help you.