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Answers to common IRS W-4 Form questions

by: Anthony Parent   2017-11-15

In support of the argument that there is nothing simple about the IRS, in this article I examine the seemingly ‘simple’ IRS W-4 Form, an Employee's Withholding Allowance Certificate. This is the form an employee fills out to indicate his tax situation to the employer so that the employer knows the “correct” amount of tax to withhold from an employee's paycheck. But like anything involving the IRS, things can get complicated and in a hurry.

 

Typical W-4 problems

 

If you claim too few exemptions, you will typical have a large refund when you file your taxes. While a large refund is nice to have, due to the present value of money, it is better to have the money sooner — during the year worked.

 

If you claim too many exemptions, you will wind up owing the IRS money and may be hit with penalties and interest. And typically from what we see, many years go by before the under-withholding problem is solved. This leads to large a balance further inflated by penalties and interest.

 

A common issue occurs for employees who work a lot of overtime. Because our tax system is progressive that is rates increase as you make more money, withholdings on overtime pay will be proportionally higher than normal pay. Many overtime workers expecting to see a large paycheck after putting in say 20 extra hours are dismayed to see the government has taken so much and they have to wait to file their taxes to get their money back. So there is a temptation to inflate deductions so the IRS isn’t keeping hard-earned overtime money for in some cases, over a year. Sometimes, employees will claim 99 dependents. But some advice on that…

 

Should I claim 99 exemptions on my W-4?

 

Claiming 99 Exemptions is not a great idea to claim on a IRS Form W-4. Unless you actually have 99+ dependents. Why? Because usually a number much lower will reduce the withholding to the desired amount. I personally know of a case where the US Department of Justice indicted taxpayers who filled out fraudulent W-4s with 99 exemptions.


How to correctly fill out a W-4 Form

 

The employee fills out the first seven lines of the W-4 form. The first few lines include the taxpayer's name, address and Social Security number. There is a worksheet above the form that lets the employee estimate the amount of allowances on his tax withholding. but it don’ts need to be completed. What you need to know is that a number of “0” will result in the smallest paycheck as the employer will maximize withholdings.The higher the number, the less that the employer withholds.


Calculating Allowances on Form W-4

 

For most people who are a depending on someone else return, the number they will put down will be a “0.” For those who are single and no children, typically you will see a “1.” There are additional allowances.  The employee can take another allowance if he's single and has just one job, is married with one job and the spouse doesn't work, or has wages from another job within the family totaling less than $1,500.

 

An employee can add the number of dependents into the withholding amount. Dependents are children, and adult relatives who don't work and are  living with the taxpayer. For example, a taxpayer whose special needs brother who is 39 and lives with them can claim his brother as a dependent. The worker can take an allowance for filing as head of household if he is unmarried and makes more than 50 percent of the household's income.

 

An employee want to claim one extra allowance if child care expenses are higher than $2,000 per year.

 

Adds together all of the allowances listed on the worksheet to get a total. Fill in the number of allowances in Line 5, and then designate any additional amount of money he may wish the employer to withhold from each paycheck. This might make sense if you have side work or investment income outside of you job that you want to report and pay taxes on without having to send in your own estimated payments.

 

When can you amend or adjust a W-4?

 

An employee can refile a new W-4 with the employers at any time during the year, such as when he or she marries, divorces. Or has a child or some other dependent. A change in status can result in the employer withholding more or less tax — but not always.

 

What must an Employer do with the W-4 form?

 

The employer calculates how much to withhold from a paycheck based on the allowances calculated on Form W-4. The money withheld goes to the Internal Revenue Service (IRS) after each paycheck. The calculations of quarterly payroll tax deposits on filed on Form 941, even though deposits may be due with each payroll.

 

An employer typically has no duty to investigate how many exemptions an employee claims.

 

What are the taxes that are withheld?

 

In additional to the federal income taxes that are withheld on behalf of the employee, there are more taxes. The current tax rate for social security is 6.2% which is capped when wages reach $127,200 for 2017.  There is the additional Medicare tax is 1.45% which does not cap-out. But what most people don’t know is that employers are required to pay an additional equal amount of Medicare taxes, and Social Security taxes. This employer’s additional contribution totals just under 16%.

 

The surprise for those who are self-employed is that they must pay the 16% as self-employment taxes. The way to get out of this is with an S-Corp election, which may help reducing total tax burden.


Why do employers have to withhold taxes?

 

The law that requires employers to withhold taxes was passed in 1943. This is a brilliant political move as it took the burden off of taxpayers to have to save for a tax bill during the year and foisted it on employers. For self-employed individuals who are responsible for their own withholding, the compliance rate is  far lower than that of employees who have their employers withhold for them. for most taxpayers tax day is a good day when they can get a refund. For those who work for themselves or don’t have withholdings, tax day is a very sad day where if they did not pay in enough by the April filing deadline, they will be subject to additional penalties and interest. This is true even if an extension is filed. An extension only grants you more time to file your return, not to pay on your return.

 

What happens if my employer doesn’t withhold my taxes? Will I still get credit for what should have been withheld?

 

Generally, yes. The IRS will credit your account for what should have been withheld. And this is why the IRS is aggressive about pursuing employers who have missed payroll tax deposits as the IRS loses twice. First, they didn’t get the money. Second, they have to credit employees for money they don’t receive.

 

What happens if I am an employer and fail to make payroll deposits. Will the IRS arrest me?

 

It is very doubtful they will arrest you if you cooperate and come up with a plan to get back on track and settle the back taxes you owe. You can file an Offer in Compromise on payroll taxes, but let’s just say there are a lot of moving pieces. Payroll tax negotiations tend to be the most difficult types of IRS tax debts to resolve properly.

 

 


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