Dealing with an Employee Who Declares Exempt on W-4

Photo by Scott Graham on Unsplash

 

Suppose some of your employees claim they’re exempt from withholding. As an employer, relax it’s the responsibility of your employees to determine whether they’re exempt, but there are caveats.

While it’s employees’ responsibility to pay penalties imposed by the Internal Revenue Service, note the following:

1. Before employees claim exemption, it’s advisable for your human resources department to firmly warn they check the IRS guidelines and criteria.

2. If employees are unconvinced: In step #1, it’s vital your company get the employees to complete Form W-4 including name, address and social security number. Then below line C in step #4, employees should write “exempt.” In step #5, employees need to sign and write the date.

3. Claims for exemptions on W-4s are only valid for the calendar year. By Feb. 15 each year, employees must submit a new W-4 to continue claiming exemptions.

4. If employees do not resubmit an exemption claim, you should withhold taxes as though they are single without any adjustments. Another option: If you have a valid W-4 from another year in which employees didn’t claim exemption, you can withhold taxes as you did that year.

It’s a good practice to encourage your employees to periodically review their W-4 withholding. Why? Your employees often have major financial changes.

W-4 form 2020

Some confusion arose after the IRS issued a new W-4 form in 2020. The confusion was over whether employees should complete the W-4 again. The answer is no. They didn’t have to fill out a new one.

New employees, of course, have to fill out a W-4. So do your existing employees whenever they decide to make one or more withholding changes.

Encouraging your employees to have up-to-date W-4s is a good practice. They don’t realize how their taxes are influenced when they work a second job, their spouse starts a job or quits working, changing marital status, adopting children or losing dependents.

So for you, there are two excellent options when to caution your employees to evaluate their withholding: 1. In December each year. 2. Just before April 15. (December, though, is the best option to help employees avoid income tax surprises.)

Your employees should be encouraged to consider the two ways to re-evaluate their tax withholding. One way is to read and use the W-4 worksheets.

The other is to go online to use the IRS Tax Withholding Estimator. The tool offers recommendations based on each employee’s situation. Fortunately, it’s processed anonymously and doesn’t save the employee’s answers. Nor does it request names or social security numbers.

States requiring state income taxes

Most states require income taxes. Some states allow employers to use the federal W-4s to determine how much should be deducted from employees’ paychecks for state income taxes.

Other states have different requirements. So, both companies and their employees should be cognizant of their respective state’s requirements. This will make certain of compliance and no negative surprises regarding taxes.

From the Coach’s Corner, editor’s picks:

How Employers Can Help Workers on Pay Withholding — If your employees need help understanding W-4s for their income taxes, you can assist them without intruding too far. Here’s how.

Avoid IRS Pain – Employee Expenses vs. Compensation — There’s some confusion over reimbursement of employee expenses as major companies have been forced to pay millions in unreimbursed expenses and fines. How to avoid issues with the IRS.