This article deals first with Form W-4, Employee’s Withholding Certificate, and then gets into the specific types of taxes that are withheld in regards to employee wages, salaries, and tips. As usual, there’s the disclaimer that this article is not an exhaustive treatment of this subject. Specifically, this article primarily goes into the purpose of the Form W-4 along with the types of taxes that are expected to be withheld from employee’s gross income.
Initially it should be noted that Form W-4 is essentially an instructional guide explaining to the employer to what degree the employee desires his income withheld. In this regard the employee has the right to explain his perceived tax situation to the employer, which the employer takes on the employee’s word. Of course, it is in the employee’s best interest to be truthful in regards to explaining how his or her gross income should be withheld for tax purposes. Too much in the way of withholding and you’ve just given the IRS an interest free loan because you’ll be getting a large refund come tax season. On the other side of the spectrum, not allowing for enough of your income to be withheld means that you’ll owe big when you file your return for that year. Therefore, in this regard it’s recommended that employees should fill out a new W-4 whenever their circumstances change with additional household income or new members to their families. The point is, be honest, and don’t be naïve in filling out your W-4.
It should be noted that if you are truly exempt from withholding, meaning that in the previous year no income tax was due for whatever reason, then you can mark your Form W-4 as exempt and not have the burden of income tax being withheld. Notice that you have to fulfill a very specific criterion for this to apply – you have to have owed no income tax in the previous tax year. This means the total amount of income taxes you owed for the entire year was zero. Even if you only owed $1,000 total, that’s still not zero and you would not qualify for exemption from withholding.
As a side note, you generally have to withhold nonresident alien employees’ wages. Furthermore, their W-4s have to be filled out in the following manner: no exemption from withholding may be claimed; withhold their income as if they are single; no claim may be made for the child tax credit or credit for other dependents; and write “Nonresident Alien” or “NRA” in the area next to Step 4(c). There are exceptions to the general requirement of having to withhold from nonresident alien employees but they’re outside the scope of this article, but if you’re interested, see IRS Publication 515.
While you, as an employer, do not have to file Form W-4 with the IRS, you do have to keep it on file in case the IRS requests an inspection of it for a given employee. If after sending the IRS a copy of an employee’s W-4, it’s found to be unacceptable, the IRS may send you a lock-in letter. This letter more or less stipulates that the employee cannot be trusted to advise you, as the employer, as to how his or her income should be withheld, and therefore the IRS is mandating a certain withholding amount. This scenario is most common when too little income tax has been withheld from an employee’s paychecks over the course of a given tax year. A copy of the lock-in letter must be given to the employee within 10 days of receipt by the employer and the new withholding standard must be implemented on all amounts paid to employees after the date in the letter. Notice that wages earned before the lock-in letter have to be withheld at the new standard specified if those wages are paid after the effective date of the new withholding level found in the letter. Incidentally, the employer is actually prohibited from either implementing the new withholding level before the specified date in the letter or allowing the employee to submit a revised Form W-4 with a withholding amount less than that demanded by the lock-in letter. Lock-in letters also apply for seasonal workers and fired and rehired workers if paid by the same employer within one year of the letter’s issuance. Finally, the terms of these letters can be changed by the IRS if the employer is subsequently sent a modification notice.
There is another letter that an employer may receive that mandates a different withholding standard, and that is Form 668W, Notice of Levy on Wages, Salary, and Other Income, which must be adhered to in a similar fashion to the lock-in letter. In this instance, the employer may only pay amounts to the employee that are exempt from the levy. This is a significant haircut to wages that always hurts, so these are horrible to be subject to from the employee’s perspective.
Up until this point, we have been discussing withholding but it’s maybe been less clear what tax we are discussing. For purposes of clarity, the Form W-4 only gives discretion to the employee as to withholding of income taxes, with social security and Medicare taxes being an immutable tax on wages, salaries and tips, which the employee has no control over. The withholding rate for social security tax is 6.2% each on the employer and employee for a total of 12.4% on wages, imposed up to the income limit of $137,700 (for tax year 2020). For Medicare, the withholding rate is 1.45% each on employer/employee, for a total amount of 2.9% on wages, with no upper limit as to employee income. For employees making more than $200,000 from a single employer, it’s mandated that the employer withhold the Additional Medicare Tax of 0.9% from all income, with no upper limit. Note that the Additional Medicare Tax does not have an employer component, meaning it is just withheld from the wages of the employee and not paid by the employer.
A few final miscellaneous points here, first, part time workers are held to the same standard of withholding as full time workers. Next, there is a religious exemption for social security and Medicare taxes for those within certain religious sects that are against insurance. Finally, a foreign employer is domestic for the purposes of social security and Medicare taxes in terms of both payment and withholding if it’s controlled by a U.S. entity and there is a government contract between the United States and the domestic control group that owns 50% or more of the foreign company.
If you’re having issues with Form W-4 or any withholding for employees, call Dino Tax Co today at (713) 397-4678 or email firstname.lastname@example.org. The first phone consultation is free. Also, if you like what we do here, don’t forget to like us on Facebook here.