Educating Employees on Filing Correct W-4 Forms
Key Messages: The Internal Revenue Service strives to collect the proper amount of revenues at the least cost to the public, and in a manner that warrants the highest degree of public confidence in our integrity, efficiency, and fairness. A correctly filed Form W-4 should result in just enough tax withheld to cover the tax liability when a tax return is filed. There are people who encourage others to deliberately violate our nation’s tax laws. Many offer advice that is false and misleading, hoping to encourage others to join them. Generally, their advice is not free. Federal courts have consistently ruled against these people. Taxpayers who purchase this kind of information often wind up paying more in taxes, interest, and penalties than they would have paid by simply filing correct tax returns. Some may subject themselves to criminal penalties, including fines and possible imprisonment.
REQUIREMENT FOR SENDING FORMS W-4 TO THE IRS ELIMINATED In the past, employers had to routinely send the IRS any Form W-4, Employee's Withholding Allowance Certificate, claiming more than 10 allowances or claiming complete exemption from withholding if $200 or more in weekly wages was expected. This requirement was eliminated in 2005. However, Forms W-4 are still subject to review. Employers may be directed (in a written notice or in future published guidance) to send certain Forms W-4 to the IRS. The IRS will be reviewing employee withholding compliance and you may be required to withhold income tax at a higher rate if notified to do so by the IRS. The IRS will also use information reported on Forms W-2, Wage and Tax Statement, to more effectively identify employees with withholding compliance problems. In some cases, where a serious under-withholding problem is found to exist for a particular employee, the IRS may issue a notice (commonly referred to as a "lock-in letter") to the employer specifying the maximum number of withholding allowances permitted for a specific employee. The employer must disregard any new Form W-4 (unless they are claiming a number of withholding allowances less than the maximum number specified in the lock-in letter) until notified by the IRS. WHEN CAN AN EMPLOYEE CLAIM EXEMPT? Taxpayers may only claim exempt status when he/she had no income tax liability last year and expects none this year. No tax liability, means they paid no tax at all. It does not mean that they paid some tax and received a refund of their remaining withholding. A Form W-4 claiming exemption from withholding is valid for only one calendar year. To continue to be exempt from withholding in the next year, an employee must give you a new Form W-4 by February 15 of that year. If the employee does not give you a new Form W-4, withhold tax as if the employee is single with zero withholding allowances or withhold based on the last valid Form W-4 you have for the employee. WHY SHOULD EMPLOYERS CARE ABOUT WHAT THEIR EMPLOYEES PUT ON THEIR FORM W-4? If an employee has a balance due on a tax return the Internal Revenue Service may issue a Notice of Levy on Wages. Employers must respond to the levy, maintain bookkeeping on the attached wages and are required send it to the Internal Revenue Service. Furthermore, they may lose a good employee when collection actions are taken if the employee should choose to quit to avoid paying what they owe. You should inform your employees of the importance of submitting an accurate Form W–4. An employee may be subject to a $500 penalty if he or she submits, with no reasonable basis, a Form W–4 that results in less tax being withheld than is required.
References: Publication 919, How Do I Adjust My Tax Withholding Publication 505, Tax Withholding and Estimated Tax Publication 15, Circular E, Employers Tax Guide www.irs.gov, Keyword “withholding calculator”