This article was written by Elizabeth Moellmer, Payroll Specialist at Helpside.
Federal Income Tax Withholding (FITW) is annual taxable earnings withheld on all wages paid to employees. Employers that pay wages are required to deduct federal income taxes from employee wages and submit them to the Internal Revenue Service (IRS). Here’s what you need to know Federal Income Tax Withholding:
How Do you Know How Much to Withhold?
Employers use the information an employee provides on their completed and signed Form W-4, the amount of the employee’s taxable earnings, and the frequency the employee is paid to determine the amount of federal income tax to withhold from each paycheck. Employers are required to calculate, withhold, file, and remit this payroll tax according to the tables established by the Secretary of the Treasury. These tables can be found in Publication 15 (Circular E) from the IRS.
As you onboard new employees, it is your responsibility to ask them to provide a completed and signed Form W-4. If an employee does not provide a completed and signed Form W-4, treat the new employee as if they had checked the box for Single or Married filing separately in Step 1(c) and made no entries in Step 2, Step 3, or Step 4 of the 2022 Form W-4.
In 2020, the IRS launched a new form removing withholding allowances, which are exemptions that lower the amount of tax deducted from an employee’s paycheck. The IRS did not require existing employees to complete and sign the updated form. You will need to calculate taxes based on either the pre-2020 form or the post 2020 form and are required to keep the employee’s Form W-4 on file.
The employee is responsible for completing and signing Form W-4 when starting a new job or if there is a withholding event that may alter the employee’s withholding or credits they may expect to claim when filing a tax return. Below are a some of the possible withholding events that may cause a change in their withholding:
- Marriage or divorce
- Birth of a child
- Buying a house
- A pay cut or a pay raise
- A dependent aged out of the tax credit
When a withholding event occurs, the employee is responsible for verifying, either through a tax expert or the IRS, that they have completed Form W-4 correctly. The employer is responsible for putting any amended forms into effect no later than the first payroll period on or after the 30th day after the employee submits the form.
Filing as Exempt
An employee who wishes to file as exempt should write the word Exempt underneath step 4c on the most current year W-4 form. The exempt form is only good until February 15th of the following year. After that, the employee must complete a new Form W-4 claiming exempt if they wish to maintain that status. If the employee does not file a new form, the employer must begin withholding as if he or she had checked the box for Single or Married filing separately in Step 1(c) and made no entries in Step 2, Step 3, or Step 4 of the 2022 Form W-4.
An Employee Doesn’t Know How to Fill out Form W-4
As an employer, it is never a good idea to give tax advice to your employees. If an employee truly does not know how to fill out their Form W-4, please direct them to a tax expert or the IRS website. There is a Withholding Estimator on the IRS website that will ask questions of the employee, then give advice on how to fill out the W-4 so they are withholding the proper amount.
There are special rules for nonresident aliens working in the United States. It is best to refer them to Notice 1392, Supplemental Form W-4 instructions for nonresident aliens.
Payroll can be complex, particularly if you have employees working in multiple states or with nonresident status. Having experts by your side can make this process easier. Here at Helpside, we have over 460 years of combined payroll experience among our payroll team. Simply reach out to Helpside at email@example.com to discuss how we can help you.