W-4 Form Information
Companies are required to collect a W-4 form from each employee in order to properly prepare payroll checks, but employees often prepare the form with little consideration to the tax implications. An improperly prepared W-4 form can result in tax withholdings that are too low.
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The Facts
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The Internal Revenue Service requires all businesses to collect a W-4 from employees. Information from the form is used to calculate payroll taxes. The form includes information such as employee name, address, Social Security number, marital status, and the total number of allowances claimed for tax withholding.
Time Frame
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A W-4 is necessary in order to process an employee's payroll check. All new employees should fill out a W-4 their first day of employment. A payroll check cannot be issued to an employee if the payroll preparer has not received a W-4.
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Features
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The W-4 form contains five sections: instructions for filling out the form, a personal allowances worksheet, a deductions and adjustments worksheet, a two-earners/multiple jobs worksheet, and the actual W-4.
Considerations
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Employees who work additional part-time jobs or have other forms of taxable income need to be sure their payroll deductions are large enough to cover the tax burden. If the amount withheld is significantly lower than the amount of tax due, the IRS has the right to charge penalties and interest on the difference. Payroll deductions for federal and state taxes are calculated based on an annualized estimate of income. For example, if an employee makes $1,000 in one month, the payroll calculation assumption is that his annualized income is $12,000. The payroll deductions are calculated based on that income bracket. If the $12,000 is earned at a part-time job, minimal taxes are withheld. However, when the employee combines the $12,000 from the part-time job with his earnings from the full-time job, it puts the $12,000 in a higher tax bracket. In that case, it is wise for the employee to make an election for additional tax withholdings.
Misconceptions
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Figuring the number of personal allowances to claim is not always straightforward. For example, if an employee is single and has no children, the logical number of personal allowances to claim is 1. However, if the employee owns a house and deducts large amounts of interest and real estate taxes, then claiming only one personal allowance might result in far too much tax being withheld. If an employee has received significant tax refunds in the past, he needs to consider increasing the number of personal allowances on his W-4. Changes can be made any time during the year.
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