What are the rules for Form W-4?

Form W-4, Employee's Withholding Allowance Certificate, should be filed on or before the day an employee starts a job. This form is what you will base withholding on for each employee.

Remember that if an employee does not file Form W-4, you must withhold as if the employee is single and had claimed zero exemptions.

What is the effective date of a W-4? A new employee's withholding allowance certificate must be put into effect as of the beginning of the first payroll period ending (or the first payment of wages made without regard to a payroll period) on or after the date on which the certificate is furnished. That certificate will remain in effect until an amended certificate becomes effective.

Does an employee's withholding change when a spouse dies? Withholding for the current year is not affected by the death of a spouse. If the employee will qualify as a surviving spouse, he or she may continue to claim married status for the two years following the spouse's death. If the employee does not qualify as a surviving spouse, an amended certificate must be filed by December 1 (or within 10 days if the death occurs after December 1) to take effect for the following calendar year.

What are personal exemptions or allowances? Personal exemptions free a specified amount of the employee's gross income from taxation on the employee's Form 1040. Withholding allowances free approximately the same amount of wages from income tax withholding, and therefore approximate the employee's tax liability at the end of the year. The value of a personal exemption is $3,650 for 20089

The value of a personal exemption is indexed annually for inflation and when used by upper-income persons is reduced and phased out when adjusted gross income reaches a specified point, which is also indexed for inflation each year. These reduction and phaseout points are built into both the wage-bracket and percentage withholding tables by the IRS. For withholding purposes, the terms exemptions and allowances are used synonymously.

An employee is entitled to one withholding exemption for each of the following:

1. Himself or herself,

2. The employee's spouse, and

3. Each dependent that may be claimed as such on the employee's income tax return.

The number of withholding exemptions to which an employee is entitled need not coincide with the number of exemptions claimed. Although the employee may not claim more exemptions than he or she is entitled to claim, the employee may claim a lesser number to minimize underwithholding. Claiming fewer exemptions on Form W-4 does not mean that the employee cannot take the full number of exemptions on his or her individual income tax return.

What exemption options are available for married employees? A married employee whose spouse is not working may claim any withholding exemption to which the spouse is entitled.

A married employee whose spouse is working may also claim any exemptions to which the spouse is entitled. This is true only if the spouse does not claim those exemptions with his or her employer.

An employee who gets married may claim an exemption for his or her spouse as soon as the employee gets married, but not before. The employee is not required to claim the exemption if he or she does not want to. An employee who ceases to be married (by divorce, for example) must stop claiming a withholding exemption for his or her spouse.

What dependency exemptions are available for employees? If an employee can claim a person as a dependent on his or her annual income tax return, Form 1040, the employee can claim a withholding exemption for that person. If the person can also be claimed as a dependent by another person, however, the exemption will not be allowed.

A person who is claimed as a dependent must first meet all of the following tests:

• It must be reasonably expected that the person will receive less than $3,400 of income during the taxable year. The income limitation will not apply to a child of the employee who is either under 19 or a full-time student. A dependency exemption may not be claimed for a student 24 years of age or older unless the student's gross income for the year is less than the value of the personal exemption. There is no income limitation for the dependency exemption for an individual who is permanently and totally disabled and receives income for services performed at a sheltered workshop school operated by a charity or the government.

• The person must receive more than half of his or her support from the employee.

• The person must be a citizen, national, or resident of the U.S., or a resident of Canada or Mexico, or an alien child adopted by and living with a U.S. citizen abroad.

• The person must be either:

  1. A child, grandchild, stepchild, parent, grandparent, stepparent, brother, sister, stepbrother, stepsister, in-law, aunt, uncle, nephew, or niece of the employee, or

  2. A member of the employee's household for the taxable year and have the employee's home as his or her principal place of abode.

The dependent will not file a joint return. The employee may claim an exemption for a married dependent if the dependent and the dependent's spouse are filing a joint return only to claim a refund of tax withheld.

Unborn children may not be claimed as dependents until the date of birth. The same is true for adoptions. An adopted child is a member of the employee's household when placed there by an authorized placement agency for legal adoption. A foster child must be a member of the employee's household for the entire year to qualify.

When may employees change their W-4? Amended certificates filed as a result of a change in the number of exemptions may be put into effect by an employer at any time. An amended certificate that affects only the following taxable year may not be put into effect for the taxable year in which it is furnished. You must put the new Form W-4 into effect no later than the start of the first payroll period ending (or the first payment of wages made without regard to a payroll period) on or after the 30th day after it is received. You also have the option of putting it into effect at an earlier date.

Notice that the option to change the W-4 rests with the employee. The employee may file an amended certificate; he or she is not required to do so. The following situations would increase the number of an employee's exemptions:

• The employee marries;

• A child is born to, or adopted by, the employee;

• The employee begins supporting a person for whom a dependency exemption can reasonably be expected to be claimed;

• The employee or spouse becomes blind (and the employee does not expect to itemize deductions on his or her individual income tax return);

• The employee or spouse reaches age 65 (and the employee does not expect to itemize deductions); or

• The employee wishes to claim additional withholding allowances based on an increase in his or her estimated deductions or credits for the year.

When must employees change their W-4? If the number of exemptions to which an employee is entitled decreases (creating a situation where more tax should be withheld), the employee must file an amended certificate within 10 days of the status change. The following situations would decrease the number of an employee's exemptions:

• The spouse for whom an exemption has been claimed has divorced or legally separated from the employee, or begins claiming exemption on a separate withholding allowance certificate;

• The support of a previously claimed dependent is taken over by someone else;

• It is no longer reasonable for the employee to expect that a claimed dependent will earn less than $3,400 for the year;

• The amount of estimated deductions or credits for the year is reduced to a point that necessitates a reduction in the additional allowances claimed; or

• The death of a dependent. If the reduction in exemptions results from the death of a dependent, an amended certificate is not required for the current taxable year, but should be filed by December 1 of the year in which the death occurred to take effect for the following calendar year.

Are there any additional withholding allowances available? An employee may claim withholding allowances in addition to regular withholding exemptions. This includes what is termed a special withholding allowance as well as allowances based on estimated deductions and tax credits. These allowances are treated as exemptions for withholding purposes only. They cannot be claimed as personal exemptions on the employee's tax return.

A special withholding allowance may be claimed whether or not the employee plans to itemize deductions on his or her tax return. There are limits on claiming this allowance, however. An employee may claim the allowance if any of the following apply:

• The employee is single and has only one job at a time;

• The employee is married and has only one job at a time and the employee's spouse does not work;

• The employee's wages from a second job or the employee's spouse's wages (or the total of both) are 10% or less of their combined total wages.

Itemized deductions and credits. Withholding allowances that are based on deductions and tax credits are designed primarily for employees who expect to itemize deductions and to take available tax credits on their individual income tax returns. A general estimate of the number of additional withholding allowances an employee may claim is obtained by dividing by the value of a personal exemption by the excess of:

1. The employee's estimated itemized deductions over

2. The standard deduction.

To calculate the exact number of additional withholding allowances based on itemized deductions, an employee should use the worksheets provided by the IRS on Form W-4, IRS Pub. 919, or IRS Pub. 505 for the applicable year.

Invalid or questionable forms. Generally, you should not be concerned with the number of exemptions and allowances an employee claims. However, the law requires you to report employees who claim excessive withholding exemptions.

You are under no duty to determine whether the number of exemptions claimed is more than the employee is entitled to. If, however, you have reason to believe that the number of exemptions claimed exceeds the number the employee is entitled to, you should so advise the appropriate IRS district director.

Submitting forms to the IRS. Employers are no longer required to submit to the IRS copies of any Form W-4 on which an employee claims more than 10 withholding allowances. Likewise, employers no longer have to submit copies of any Form W-4 on which employees claim complete exemption from withholding, if the employer reasonably expects that the employee's wages will be more than $200 a week. Instead, employers must submit a copy of any currently effective Form W-4 only if directed to do so in a written notice from the IRS or through any published guidance.

If the IRS issues a notice indicating the maximum number of withholding exemptions permitted and an employee wants to claim complete exemption from withholding or claim more withholding exemptions than the number specified by the IRS, the employee must send a new certificate and written statement directly to the IRS.

Sample form. To see a sample Form W-4, go to ¶36,225