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Employers must process new W-4 forms accurately and by strict IRS deadlines to avoid penalties and ensure correct federal tax withholding. Mishandling this foundational payroll document can lead to compliance issues, employee dissatisfaction, and financial liability for the business.
What is a Form W-4 and How Does Withholding Work?
A Form W-4, officially titled the "Employee's Withholding Certificate," is an IRS document that tells an employer the correct amount of federal income tax to withhold from an employee’s paycheck. The process of withholding tax, often called payroll withholding, is when an employer deducts income tax from an employee's wages and sends it directly to the IRS. This system acts as a pay-as-you-go method for collecting income taxes. Essentially, if an employee opts for lower withholding throughout the year, they will likely owe more money when they file their annual tax return. Conversely, higher withholding typically results in a smaller tax bill or a potential refund.
What Makes a W-4 Form Invalid and What Should You Do?
A Form W-4 becomes invalid if any required information is missing, if it lacks the employee's signature, or if there are any unauthorized alterations to the official language. According to Treasury Regulations, you should also reject a form if an employee indicates it is false. Based on our assessment experience, the most common issues are unsigned forms or incorrectly calculated withholding allowances.
If you receive an invalid W-4, do not use it for payroll processing. Instead, ask the employee to complete a new form correctly. If the employee fails to provide a valid form, you are required to withhold taxes as if they are single with zero allowances. If a previous valid W-4 is on file, continue using those instructions until a new, correct form is submitted.
When Must a New W-4 Be Implemented and How Often Can It Be Changed?
Employers have a clear deadline for action: a new or updated W-4 must be implemented by the start of the first payroll period ending on or after the 30th day from its receipt. For example, if you receive a form on the 4th of the month and your payroll periods end on the 15th and 30th, you must apply it to the payroll ending on the 15th.
Employees can change their W-4 at any time and as often as they wish, particularly after major life events like marriage, divorce, or the birth of a child. However, employers must ensure the most current, signed form is received before processing the next payroll run. It is illegal for an employer to complete the form on the employee's behalf.
What Are the Critical Compliance Rules for Storing W-4s?
The IRS mandates strict protocols for W-4 retention and submission. Original copies of Forms W-4 must be kept on file for at least four years after the employment tax is due or paid, whichever is later. You cannot accept forms via phone or email; only original ink-signed forms or submissions through an IRS-compliant electronic system are valid. Scanned copies are not acceptable for official records, as the IRS may request to inspect the original documents.
How Should You Handle an IRS "Lock-In" Letter?
A "lock-in" letter is an official IRS directive that mandates a specific withholding rate for an employee, overriding their current W-4. If you receive one, you must immediately provide a copy to the employee and follow the IRS's withholding instructions precisely, ignoring any future W-4s that attempt to increase allowances. Failure to comply can make the employer liable for the tax that should have been withheld, plus penalties.
To ensure compliance and smooth payroll operations, employers should:
