If you’ve ever accepted employment before, you’re probably familiar with the W-4 Form. The W-4 is also referred to as the Employee’s Withholding Allowance Certificate. It’s essentially your employee’s way of telling their employer the correct amount of federal income tax to withhold from their pay.
It’s required that you have your new employee complete the W-4 Form when they’re hired, but the IRS actually recommends that all your employees complete it every year, or at least any time their personal or financial situation changes. For example, federal income tax withholding for a single filer is different from a married filer. Same thing for a filer with no dependants compared to a filer with one or more dependants.
The tax that’s withheld from your employee’s paycheck goes directly to the IRS. By taking this money out of every paycheck, the IRS is essentially withholding their anticipated tax payment as they earn wages throughout the year. On the other hand, independent contractors, or 1099 employees, don’t necessarily pay income taxes throughout the year. So they’ll be forced to pay a lump sum to the IRS by April 15th for all the federal income taxes they owe from the previous year.
Employees can control how much is withheld from every paycheck by altering their filing status and adding additional withholding amounts. They may ask their employer for advice on how they should file. While you should be well-equipped to help them with their options, technically this is not your advice to give. Your employee needs to make this decision on their own.
What we can say, and what many employees want to know, is that generally, the more income tax they withhold from each paycheck, the greater their annual tax refund might be - because essentially they overpaid the IRS. Now, some people don’t like this idea, because essentially what they’ve done is given the IRS an interest free loan for the year. On the other hand, if your employee doesn’t withhold enough from their paychecks, they could have to pay an additional sum to the IRS instead of getting a refund. And sometimes they can be subject to penalties and interest charges for under-withholding.
For most taxpayers, it’s recommended to try to match their withholding tax to their actual tax liability as closely as possible.
And if an employee doesn’t fill our their tax forms, taxes will be withheld from their paycheck at the highest tax bracket, single and 0 dependents.
Get a copy of the W-4 Form here.