What is a W-4 form? Your small business guide

A W-4 – also called an Employee’s Withholding Certificate – is an IRS tax form that employees fill out to tell their employer how much federal income tax to withhold from their paycheck.

A small business must oversee this admin to comply with tax laws and run a smooth payroll.

What is a W-4 form used for?

An employee must complete a W-4 when they first join a business, and whenever their personal or financial situation changes.

Once the employer receives this form, they can update their records and withhold the right amount of tax.

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

In 2020 the IRS changed the W-4 form to make it simpler and clearer.

Previously, the form used ‘withholding allowances’ linked to personal exemptions, (your tax-free income) to calculate withholdings. The new form asks questions about your filing status, income, dependents, and deductions instead.

Why W-4 forms matter to your small business

Here are reasons why W-4 forms are important for your small business:

Paying the right amount of tax

As long as your employees fill out the form correctly, they’ll pay the right amount of tax – meaning you’ll withhold the right amount from their paychecks to pass on to the IRS.

Managing your payroll

W-4 forms help you calculate each employee’s pay. They’re central to your payroll process as you need to update each employee's details in your system whenever their tax status changes.

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The IRS may charge your employees a penalty for submitting an incorrect or outdated W-4 form that results in them paying too little tax. More details on IRS W-4 form penalties.

Happier employees

Your employees won’t thank you for any 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

Here’s some guidance if an employee asks you for help with their W-4 form:

Provide their basic personal information

Employees need to provide some personal information, including their:

• Name and address
• Social Security number (SSN)
• Filing status (single, married, or head of household)
• Number of 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

If an employee has more than one job or a legal partner who does paid work, they must say so on the form. Encourage your staff to use this IRS tool to estimate their tax withholding.

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 include adjustments on their W-4 form that affect the withholding tax they pay, such as:

• Passive income from investments
• Other sources of income like second jobs
• Deductions – things like standard deductions 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?

It’s your responsibility to update your payroll system and financial records. This applies whether you have notice – your employee tells you they’re getting married in 6 months, say – or another tells you a week before payday that their income has changed.

Either way, you’ll need to withhold the right amount of money from their paycheck.

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?

Maybe you’re wondering: what do I do with my employees’ W-4 forms if they work remotely or part-time?

The same process applies – all employees, no matter their hours or location, must fill out W-4 forms.

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

While you might guide them in the basics, make sure you don’t give any tax advice as this could land you with liability issues. Instead, direct employees to the IRS Tax Withholding Estimator and other online resources from the IRS.

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

You need to hold onto your W-4 forms and payroll records for at least 4 years after you paid your taxes or the date these were due. It’s best to store the forms digitally so they’re secure and easily accessible.

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

• Not collecting updated W-4 forms when employees’ tax situations change means out-of-date records and, therefore, withholding the wrong amounts of tax. Set time aside every 2 weeks or each month – depending on your pay run schedule – to do this.
• 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. All employees who earn over the tax threshold 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

You’ll want to develop airtight admin processes so that your W-4 forms and other admin get done on time and without mistakes. So 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.

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 the employee is single with no dependents – resulting in a higher withholding amount.

Can employees claim ‘exempt’ on their W-4 forms?

Yes – if an employee doesn’t expect to owe any federal income tax for the year, they can claim ‘exempt’ status. But they should think carefully before doing this because they could be penalized for an incorrect claim.

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