W-4 form: What it is and how your small business uses it

Published Thursday 29 January 2026

Table of contents

• What is a W-4 form used for?
• W-2 vs W-4: What's the difference?
• Why W-4 forms matter to your small business
• Help your employees complete W-4 forms
• What should employers do with W-4 forms?
• What about W-4 forms for part-time employees?
• Common mistakes to avoid on your business's IRS W-4 form
• Understand your payroll to stay compliant
• Nail your payroll with Xero accounting software
• FAQs on W-4 forms

Key takeaways

• Complete a new W-4 form whenever your personal or financial situation changes, such as getting married, having children, starting a second job, or changing your filing status to ensure accurate tax withholding.
• Update your payroll system immediately when receiving new W-4 forms from employees and apply the changes no later than the start of the first payroll period ending on or after the 30th day from when you received the form.
• Store all W-4 forms for at least 4 years after the tax due date or payment date, whichever is later, and maintain both digital and backup copies with restricted access to authorized personnel only.
• Provide employees with IRS resources like the Tax Withholding Estimator for completing their forms, but avoid giving specific tax advice or recommending withholding amounts to protect your business from liability.

What is a W-4 form used for?

W-4 forms are required in these situations:

• New hires: All employees must complete a W-4 on their first day
• Life changes: Marriage, divorce, or having children
• Income changes: Starting a second job or receiving additional income
• Tax status updates: Changes in filing status or dependents

Once you receive the completed form, update your payroll records to withhold the correct tax amount.

How is the new W-4 form different from the old one?

The 2020 W-4 update simplified tax withholding calculations. Here's what changed:

Under the old W-4 system, the form:

• Used withholding allowances based on personal exemptions
• Required complex calculations for tax-free income

Under the new W-4 system, the form:

• Uses direct questions about filing status and income
• Includes specific fields for dependents and deductions
• Eliminates confusing allowance calculations, as allowances are no longer used for the redesigned Form W-4 to increase transparency and simplicity.

W-2 vs W-4: What's the difference?

It's easy to mix up tax forms, especially the W-2 and W-4. While they both relate to employee taxes, they serve very different purposes at different times of the year.

A Form W-4, Employee's Withholding Certificate, is what an employee fills out when they start a new job. It tells you, the employer, how much federal income tax to withhold from their paycheck.

A Form W-2, Wage and Tax Statement, is what you send to your employees at the end of the year. It shows their total earnings for the year and how much tax was already withheld.

Think of it this way: the W-4 provides the instructions for withholding, while the W-2 is the report of what was actually withheld.

Why W-4 forms matter to your small business

W-4 forms protect your business from tax compliance issues while ensuring accurate employee payroll. Here's why they matter:

Paying the right amount of tax

Accurate tax withholding prevents under-payment and over-payment issues. When employees complete their W-4 correctly, you withhold the exact amount needed for Internal Revenue Service (IRS) compliance. This protects both your business and your employees from tax penalties.

Managing your payroll

Streamlined payroll management starts with accurate W-4 information. These forms provide the tax data needed to calculate each employee's net pay. When employees submit new W-4 forms, the IRS requires that you update your payroll system and put the changes into effect no later than the start of the first payroll period ending on or after the 30th day from the date you received the form.

Keeping accurate pay records

How do you organize your pay and other financial records? Store them in an orderly system and you'll be ready at tax time and if the IRS performs any audits or inquiries.

Avoiding penalties

The IRS may charge your employees for submitting an incorrect or outdated W-4 form that results in them paying too little tax; in fact, an employee may be subject to a $500 penalty for submitting a W-4 with no reasonable basis. More details on IRS W-4 form penalties.

Happier employees

Your employees will appreciate avoiding tax surprises at the end of the financial year. Build trust by processing their paperwork accurately and on time.

Help your employees complete W-4 forms

W-4 completion guidance helps employees fill out their forms accurately while protecting your business from liability. Here's how to assist without providing tax advice:

Provide their basic personal information

Required personal information includes:

• Name and current address: Must match Social Security records
• Social Security number: Required for tax reporting
• Filing status: Single, married filing jointly, married filing separately, or head of household
• Dependents: Number of qualifying children and other dependents

They need to choose the correct filing status because it affects the amount of tax you withhold. Find your IRS filing status.

Account for partners and multiple jobs

Multiple job situations require special handling:

• Multiple jobs: Employees must indicate if they have more than one job
• Working spouses: Must report if their spouse also works
• Withholding calculation: Direct employees to the IRS Tax Withholding Estimator for accurate calculations

Add children and dependents

Employees who earn below a certain amount can claim tax credits for their children and other dependents. Doing so lowers the total taxes they owe meaning they take home more pay. Read about claiming Child Tax Credits.

Include other adjustments

Employees should note anything on their W-4 form that affects how much tax you withhold, such as:

• Passive income from investments
• Other sources of income like second jobs
• deductions: things like the standard deduction and certain tax credits

Sign and date the form

Once they've completed the form, your employees must return it to you for processing. Double-check they've signed and dated the form.

What should employers do with W-4 forms?

Employer responsibilities include immediate payroll updates when receiving new W-4 forms. Here's your process:

1. Update payroll system: Enter new withholding information immediately
2. Adjust next paycheck: Apply changes starting with the next pay period
3. Document changes: Keep records of when updates were made
4. Verify accuracy: Double-check calculations before processing payroll

This applies to all W-4 changes, whether you receive advance notice or last-minute updates.

And don't forget to keep all W-4 forms on file for your year-end financial reporting. (The same goes for your W-2 forms.)

What about W-4 forms for part-time employees?

All employees need W-4 forms regardless of work arrangement. This includes:

• Remote workers: Same requirements as on-site employees
• Part-time staff: Must complete W-4 regardless of hours worked
• Seasonal employees: Required even for temporary positions
• Contract workers: May need W-4 depending on classification

What if an employee asks for help filling out their form?

Safe guidance practices protect your business from liability:

Do:

• Explain form sections and requirements
• Provide IRS resources and tools
• Direct employees to the IRS Tax Withholding Estimator

Don't:

• Give specific tax advice
• Recommend withholding amounts
• Interpret tax situations for employees

How long should employers keep W-4 forms on file?

W-4 retention requirement: According to the IRS, you must keep it in your records for at least 4 years after the tax due date or payment date, whichever is later.

Best storage practices:

• Digital storage: Scan forms for secure, accessible records
• Backup systems: Maintain copies in multiple locations
• Access controls: Limit access to authorized personnel only

Common mistakes to avoid on your business's IRS W-4 form

Missing W-4 updates leads to incorrect tax withholding and compliance issues.

Prevention steps:

• Regular check-ins: Review W-4 status during each pay period
• Employee reminders: Notify staff when life changes require updates
• System alerts: Set calendar reminders to request updated forms
• Documentation: Track when forms were last updated

Failing to correctly enter withholding information into your payroll system leads to errors in your financial records, mistakes in pay, and problems with IRS compliance. Double-check the information for errors.

Not understanding how to handle different types of employees, such as part-time or seasonal workers, can create similar issues with pay and compliance. In general, employees who earn over the relevant tax thresholds may need to pay income tax and complete W-4 forms, even if they only work for you for a short period.

Understand your payroll to stay compliant

Set up clear admin processes so your W-4 forms and other paperwork are completed on time and without mistakes. Make sure you fully understand payroll and who does what in this area of your business.

Do you know all the deductions your team is entitled to (including pension contributions)? How about what to report to the tax office? Check out this guide to getting your head around payroll.

Nail your payroll with Xero accounting software

Life as a small business owner is easier with the right tools and software. Xero accounting software helps you run payroll with automation, online filing, and an employee portal. It helps you stay on top of your financial admin with less manual work. Get one month free.

FAQs on W-4 forms

Do all employees need to fill out a W-4 form?

Yes, all employees must complete a W-4 form and give it to their employer. This includes seasonal, remote, casual, and part-time staff.

How often should employees update their W-4 forms?

Employees don't need to update their W-4s every year, but they should fill out a new form whenever their personal or financial situation changes – when they get married, have a child, or earn additional income.

What happens if an employee doesn't submit a W-4 form?

If your employee doesn't submit a W-4 form, you must withhold taxes as if they are a single filer with no other adjustments, which results in a higher withholding amount.

Can employees claim 'exempt' on their W-4 forms?

Yes, if an employee does not expect to owe any federal income tax for the year, they can claim “exempt” status. To maintain that status for the following year, they must provide a new W-4 by February 15 of that year. But they should think carefully before doing this because they could be penalized for an incorrect claim.