Employer Best Practices for Maximizing Updated W-4 Compliance

Payroll professionals discussed tips and best practices for complying with requirements for the updated Form W-4, Employee’s Withholding Certification, during the 42nd Payroll Congress in Nashville.

General Principles

In 2020 the IRS introduced a redesigned Form W-4, which underwent significant changes as a result of the Tax Cuts and Jobs Act. Many of the changes introduced through the TCJA, like the elimination of personal or dependency exemptions, are set to sunset in 2025.

“So long as sections one and five are completed, you have a complete W-4,” said Gerard Hall, director of payroll operations for CBIZ and a member of the Bloomberg Tax Payroll Advisory Board. Step 1 of the form determines the individual’s standard deduction based on their filling status, which can greatly impact an employee’s withholding. “Using the wrong deduction can determine whether you owe a refund or are entitled to one,” said Ronald Moser, director of payroll training at PayrollOrg. Regarding an individual’s filing status, employers were reminded to simply accept the choice made by the employee. “It’s not our place to validate whether an employee is married or single,” Hall added, as long as one of the boxes is checked. Step 5 includes a perjury statement, which the employee signs, certifying that the information provided is correct.

Step 2 of the form may be filled out by employees claiming spousal income or multiple sources of employment. Employees interested in filling out Step 2 should consider using the IRS tax estimator, Hall said. “It’s a really great tool, but it’s not something you can do in five minutes, so pack a lunch.”

Steps 3 and 4 of the Form W-4 consider elective credits and additional sources of income. Employees can opt to voluntarily have additional taxes withheld, an option employees are always free to exercise. For some, “it’s simply a way to manage their finances,” said Hall. Employers can use Step 3, Claim Dependents, to claim other credits, even if the misnomer makes many limit their claims to dependent care. Employees who claim credits on their Form 1040, US Individual Income Tax Return, such as adoption assistance or residential energy credits, can take that credit during the year under their W-4.

Best Practices

The redesigned form is used by newly hired employees that started on or after Jan. 1, 2020. It can also be filed out by employees hired before Jan. 1, 2020, who wish to adjust their withholding. Any employee who claims exemption from withholding must file their W-4 annually to renew the exemption. Any employee who wishes to submit an exempt form but fails to do so by February 15 should be treated as a single filer with no adjustments until the updated W-4 is submitted, said Hall.

When discussing employers’ responsibilities, Hall and Moser reminded attendees to never give employees legal advice; however, employees can be warned of the practical effects of their choices. “You can tell an employee how their entries may increase or decrease their withholding, but you can’t coach them to enter information based on their personal tax situation,” said Hall.

Employers should also avoid making judgment calls as to the validity of an employee’s exemption selection. “You can let them know how to mark an exemption, but you cannot refuse to accept it. It is not your business whether they qualify or not,” Hall emphasized. Switching payroll processing systems is not a valid reason to have all employees fill out new forms, Hall said. Similarly, employees with older forms on file cannot make changes to the old form. “If the employee’s situation has changed, they must file a new W-4,” Moser said.

While discouraged from providing employees with legal advice, employers can incorporate notice systems that warn employees of the effects of their choices. For employees selecting an exemption from withholding, the warning can come in the form of an email notifying them of the selection and demonstrating what an exempt W-4 looks like. You may even email the employee to confirm the selection was not an error, “but as far as your responsibilities go,” said Hall, “as long as your system mirrors the W-4, you’ll be in the clear.”

A clear company policy for W-4 updates can help employers mitigate any potential liability. For CBIZ , Hall said, W-4 updates were required to arrive before our Friday meetings. If it arrived any time after the Friday meeting, it would not be processed for the current pay period, he said. Auditors like to see consistency in company policies during an audit, and a clear policy statement can help employers establish a consistent practice.

Toward the end of the discussion, an attendee asked Hall why his W-4 has not changed since 2018, to which he simply replied, “I don’t have to. My situation hasn’t changed.”