When you hire an employee, you must have the employee complete a Form W-4(PDF), Employee's Withholding Allowance Certificate. Form W–4 tells you, as an employer, how many withholding allowances to use when you deduct Federal income tax from the employee's pay. Form W-4 includes detailed worksheets to help the employee figure his or her correct number of withholding allowances. Employees may also want to access the withholding calculator on the IRS website at www.irs.gov/individuals for help in completing Form W-4.

Form W–4 is also used by an employee to tell you not to deduct any Federal income tax from his or her wages. To qualify for this exempt status, the employee must have had no tax liability for the previous year and must expect to have no tax liability for the current year. However, if the employee can be claimed as a dependent on a parent's or another person's tax return, additional limitations apply. See the instructions for Form W-4. A Form W-4 claiming exemption from withholding is valid for only one calendar year. To continue to be exempt from withholding in the next year, an employee must give you a new Form W-4 claiming exempt status by February 15 of that year. If the employee does not give you a new Form W-4, withhold tax as if he or she is single, with zero withholding allowances. However, if you have an earlier Form W-4 for this employee that is valid, withhold as you did before.

After the employee completes and signs the Form W–4, you should keep it in your files. This form serves as verification that you are withholding federal income tax according to the employee's instructions. Do not send it to the IRS.

However, if you receive a Form W–4 on which the employee claims more than 10 withholding allowances, or claims exemption from withholding and his or her wages would normally be expected to exceed $200 or more a week, you must send a copy of that Form W–4 to the IRS with your next Form 941(PDF). Complete boxes 8 and 10 on each Form W-4 that you submit. If you want to submit the Form W–4 earlier, you can send a copy of the Form W–4 to the IRS. If you do so, include a cover letter giving your name, address, EIN, and the number of forms included. Any Form W-4 that you send to the IRS without a Form 941 should be mailed to the "Return Without a Payment" address on the back of Form 941. IRS will send you further instructions if it determines that you should not honor any Form W–4.

Form W-4 may be filled with the IRS on magnetic media or electronically. If you wish to file on magnetic media or electronically, get Publication 1245, Specifications for Filing For W-4, Employee's Withholding Allowance Certificate, Magnetically or Electronically. You can get more information about magnetic media or electronic filing by calling the IRS Martinsburg Computing Center at 1–866–455–7438 (toll free) or 304–263–8700 (not toll free).

You should inform your employees of the importance of submitting an accurate Form W–4. An employee may be subject to a $500 penalty if he or she submits, with no reasonable basis, a Form W–4 that results in less tax being withheld than is required.

You should keep blank Forms W–4 for the current year on hand so you can provide them to your current and new employees. An employee may want to change the number of withholding allowances or his or her filing status on Form W–4 for any number of reasons, such as marriage, an increase or decrease in the number of dependents, or an increase or decrease in the amount of itemized deductions or tax credits anticipated for the tax year. Any of these reasons could affect the employee's tax liability. If you receive a revised Form W–4 from an employee, you must put it into effect no later than the start of the first payroll period ending on or after the 30th day from the date you received the revised Form W–4.

If an employee fails to give you a properly completed Form W–4, you must withhold federal income tax from his or her wages, as if he or she were single and claiming no withholding allowances.

Any unauthorized change or addition to Form W-4 makes it invalid. This includes taking out any language by which the employee certifies that the form is correct. A Form W-4 is also invalid if, by the date an employee gives it to you, he or she indicates in any way that it is false. When you get an invalid Form W-4, do not use it to figure federal withholding. Tell the employee that it is invalid and ask for another one. If the employee does not give you a valid one, withhold taxes as if the employee was single and claiming no withholding allowances. However, if you have an earlier Form W-4 for this employee that is valid, withhold as you did before.

For additional information, refer to Publication 15, Circular E, Employer's Tax Guide, Publication 505, Tax Withholding and Estimated Tax, and Publication 919, How Do I Adjust My Tax Withholding?