Federal Form W‑4 Used for Withholding

Federal Form W‑4 for Withholding: Key Takeaways

Form W‑4 directs employers on the amount of federal income tax to withhold from employee paychecks.
The 2020 redesigned W‑4 eliminates withholding allowances and focuses on income, dependents, deductions, and additional withholding.
Employers must implement changes within 30 days and retain W‑4 forms for at least four years.

Form W‑4, known as the Employee's Withholding Certificate, helps employers withhold the correct federal tax from wages.

This article explains how to complete and understand Form W‑4, as well as employer responsibilities and changes made in 2020.

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1. Understanding Form W‑4 and Its Purpose

Form W‑4 is completed by employees to inform their employer how much federal income tax to withhold from their paychecks.

Accurate withholding reduces the chances of owing taxes at year-end or receiving an unexpectedly large refund.

The form guides withholding based on an employee’s filing status, multiple jobs, dependents, other income, and deductions.

2. Key Components of Form W‑4

Step 1: Personal Information

Employees provide their name, address, Social Security number, and choose filing status, such as Single, Married Filing Jointly, or Head of Household.

Step 2: Multiple Jobs or Spouse Works

This section applies if the employee has more than one job or their spouse also works.

Employees adjust withholding by choosing one method:

Use the IRS Tax Withholding Estimator online.
Complete the Multiple Jobs Worksheet included in the instructions.
If only two jobs exist total, check the box in Step 2(c) for higher withholding.

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Step 3: Claim Dependents

Qualifying children and other dependents are entered here to reduce withholding. This accounts for tax credits based on dependents.

Step 4: Other Adjustments (Optional)

Allows employees to report additional income (e.g., interest, dividends), claim deductions beyond the standard deduction, or request extra withholding amounts per pay period.

Step 5: Signature and Date

The form must be signed and dated to be valid. Unsigned forms are not accepted by employers.

3. Recent Changes to Form W‑4

In 2020, the IRS redesigned Form W‑4 to remove the concept of withholding allowances, which were based on personal and dependent exemptions.

The Tax Cuts and Jobs Act of 2017 suspended personal and dependent exemptions from 2018 through 2025, rendering allowances obsolete.

The new form requires employees to provide income and deduction information directly, resulting in more accurate withholding that reflects their tax situation.

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4. Employer Responsibilities for Form W‑4

Employers must update payroll withholding based on a new or revised Form W‑4 by the start of the first payroll period ending at least 30 days after receiving the form.

They must retain each employee’s most recent Form W‑4 for a minimum of four years as documentation for tax withholding compliance.

This recordkeeping is vital in case of IRS audits or inquiries.

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5. Claiming Exemption from Withholding

Employees who had no federal tax liability last year and expect none this year may claim exemption from withholding.

They must write “Exempt” below Step 4(c) on Form W‑4 and submit a new form each year by February 15 to continue the exemption.

6. State Withholding vs. Federal Withholding

While the federal Form W‑4 no longer uses withholding allowances, many states still do.

States like California, Georgia, and New York incorporate allowances for state income tax withholding.

Employers should verify and comply with each state’s specific withholding rules, which may require employees to complete separate state withholding forms or provide additional information.

Employers might be interested in exploring a complete guide to multi-state payroll for smooth federal and state withholding compliance.

7. Additional Resources for Form W‑4 Information

Federal Form W‑4 for Withholding: Conclusion

Form W‑4 plays a critical role in ensuring the correct federal income tax is withheld from employees’ wages, helping taxpayers meet their tax obligations accurately throughout the year.

Understanding, properly completing, and timely submitting Form W‑4 benefits both employees and employers by preventing unexpected tax bills or excessive refunds.

Employers have legal responsibilities to process forms correctly and retain them as proof of compliance with federal tax withholding regulations.

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01. What is the purpose of Form W-4?

Form W-4 helps employers determine the correct amount of federal income tax to withhold from an employee’s paycheck.

02. How did the 2020 redesign of Form W-4 affect withholding allowances?

The 2020 redesign eliminated withholding allowances due to changes in tax law suspending personal and dependent exemptions, making the form more accurate by focusing on income, deductions, and dependents.

03. What must employers do after receiving a new or revised Form W-4?

Employers are required to update payroll withholdings within 30 days and retain the most recent form for at least four years.

04. Can employees claim exemption from withholding?

Yes, employees who had no federal tax liability last year and expect none this year may claim exemption by writing ‘Exempt’ on Form W-4 and submitting a new form annually by February 15.

05. Do states follow the federal Form W-4 withholding rules?

Not always. While federal Form W-4 no longer uses withholding allowances, many states still require allowances or have their own forms to manage state income tax withholding.