From the very first day a small business becomes an employer, they take on new challenges and responsibilities. With every new employee, they’re responsible for new hire paperwork, withholding taxes, and more.
If that sounds familiar, you may have searched around for guidance or explanations of what payroll taxes or IRS forms mean—and you probably came out the other side just as confused as your started. Even the Internal Revenue Service (IRS) website can yield more confusion than clarity.
That’s why we’ve created this guide, among others—to demystify the payroll taxes, reporting, and IRS forms that come along with becoming an employer.
In this guide, we’re talking about IRS Form W-4, the Employee’s Withholding Allowance Certificate. We explain everything employers new and old need to know, including:
- What Form W-4 is
- Why employers need to have employees fill it out
- How to know if you need to have employees fill out W-4 forms
- When to have employees fill out W-4 forms and how to submit them
What is Form W-4?
If you’re in a rush, here are the main points to know about Form W-4:
- What’s reported on Form W-4: Employee marital status, tax allowances and additional deduction amounts
- When it’s filed: Upon hire of a new employee
- Who needs to file: Most employers in the U.S.
In short, Form W-4 is a document employers are required to collect from each new employee when they start, and it serves a few purposes.
For one, it’s how employers tell the IRS and other tax authorities that they’ve hired a new employee. Form W-4 also tells you, the employer, how much income and Federal Insurance Contribution Act (FICA) tax to withhold from each employee’s paycheck.
The typical W-4 form includes details about the employee’s life situation including:
- Marital status
- Tax allowances
- Additional deduction amounts
In addition to filling out Form W-4 upon starting a new job, employees can also choose to submit a new W-4 form whenever they experience a life change that affects the information on the form.
How is Form W-4 different from Forms W-2 and W-3?
Forms W-4 and W-2 are closely linked. The information employees set forth on Form W-4 directly impacts the amount of tax you withhold from their paychecks. The final tally of that withholding is reported annually on Form W-2, which is submitted to the Social Security Administration (SSA) by the employer.
Form W-3 is a complement to Form W-2—but it’s more distantly related to Form W-4. Whereas W-4 forms denote how much tax should be withheld from an employee’s pay, Form W-3 serves as a cover sheet for all of the annual W-2 forms an employer must file.
Forms W-2 and W-3 IRS are both filled annually with the SSA, but Form W-4 is submitted whenever a new hire starts work and filed with the employer’s relevant State Directory of New Hires.
How is Form W-4 different from Form W-9?
Forms W-4 and W-9 are similar in that both need to be filled out whenever a new working relationship is formed. While Form W-4 is filled out by employees and submitted by employers, Form W-9 is used by independent contractors and the companies who work with them.
Form W-9 is how companies ask those freelancers and contractors for the information they’ll need to create a 1099-MISC form for them (when tax season rolls around). The W-9 form includes information like:
- The contractor’s name, address, and business name (if different from their name)
- The contractor’s taxpayer identification number (TIN)
- Classification of the contractor’s business as sole proprietor, partnership, S corporation, etc.
Why employers need their employees to fill out Form W-4
With each paycheck issued to an employee, the employer is required to withhold a certain amount for income taxes and FICA taxes. The employer then deposits that withholding with the appropriate tax authority.
When it comes to withholding income tax, the amount you should withhold (a percentage of the top-line income) varies based on:
- The individual employee’s expected annual earnings for the year
- Their marital status
- The tax allowances they claim
- Additional deduction amounts
As such, employers need a mechanism for getting this information from each new employee. That’s where the W-4 form comes into play.
In addition, employers need to report all new hires to their relevant State Directory of New Hires—and Form W-4 serves this purpose, too.
What are withholding taxes anyway?
Whether as an employee or an employer, you’ve likely come across the concept of tax withholding. However, you may not be entirely in the loop on what they mean or include. When it comes to payroll taxes and employment, there are three main types of tax:
- Employer taxes
- Shared taxes
- Withholding taxes
Both income tax and FICA taxes fall into the withholding bucket—because the employer withholds them from an employee’s pay and deposits them with the IRS or state tax authority.
Income taxes represent the bulk of the IRS tax base and are paid entirely by the employee. It’s important to note that income taxes vary based on the income tax bracket an employee’s annual earnings denote.
FICA taxes, on the other hand, pay into social safety net programs (like Social Security and Medicare) within the Social Security Administration (SSA). They’re based on a set percentage for every U.S. employee (for 2019, that’s 6.2% for Social Security and 1.45% for Medicare) and are split (typically 50/50) between the employee and employer—so they actually fall under both withholding and shared taxes.
Do I need to have employees fill out Form W-4?
If you’re starting to ask yourself whether you need to have employees fill out W-4 forms, you’re probably not alone. The short answer is that, if you have at least one employee, you need to have them fill out a W-4 form as part of their new hire paperwork and on-boarding—and you need to file it with your State Directory of New Hires.
Even if your new employee is exempt from withholding for one reason or another, they must fill out Form W-4 to claim this exemption (see Box 7 on the form).
How to submit Form W-4
For this section, we’ll assume you’ve just hired a new employee—therefore you’re required by law to collect a W-4 form and file it with your state’s directory. Let’s talk about the how and when.
In addition to the information employees complete, employers are required to fill in Boxes, 8, 9, and 10 on Form W-4 before submitting it. For those lines, you’ll need to have the following information on hand:
- Your business name and address
- The first date the employee started work
- Your Employer Identification Number (EIN)
When to have employees fill out Form W-4
The legal requirements of reporting your new hire to the proper tax and other authorities kicks in when the employee first starts work. So the obvious time to have a new employee fill out Form W-4 is the day they begin work for your business.
Depending on your state of business, the time frame you have to report a new hire can vary (sometimes as short as 7 days after hiring), so it’s important to reference the state directory matrix in preparation for an employee’s start date.
In addition, certain changes in your employees’ lives can affect the information on their W-4 form, so many employers opt to have employees complete a new W-4 form for each new year.
Note: You are not required to submit or file these additional W-4 forms—they’re used only for your business’ own withholding and payroll processes.
What to do with completed W-4 forms
In addition to the time you have to file new hire W-4 forms, the method(s) of filing allowed cna vary from state to state. To find out which filing options your state accepts, you can reference the state directory matrix we linked to in the previous section above.
In general, your state may accept Form W-4 via one or more of these methods:
- Online state portal
- Electronic reporting transmission
- Mail or encrypted mail
- Payroll service
- Personal delivery
For more details on how to submit W-4 forms via the accepted method for your state, you can reference the relevant state website listed in the directory matrix or contact your state directly.
While W-4 forms are among the most straightforward IRS forms, there’s still a lot for employers to know about them. To wrap up, here are the most important details to keep track of:
- W-4 forms tell relevant authorities that a new hire has been made and tell the employer how much tax to withhold from an employee’s pay
- Nearly every employer in the U.S. must collect and file Form W-4 for each new employee
Download the form on the IRS website and get details on filing in the State Directory of New Hires matrix