Withholding
Exemptions for Employees
The total federal income tax that you withhold
from an employee's wages during the year is supposed to
approximate the employee's year-end tax liability.
However, when your employees prepare their annual tax
returns, they don't pay tax on their entire gross wages. Rather,
they reduce their gross wages (and other income) by personal
exemptions for themselves, their spouses, and their dependents
and by various deductions in determining the portion of their
income that is actually taxable. To account for these exemptions
and deductions in the tax
you withhold, your employees are entitled to claim
withholding exemptions.
Generally speaking, the more withholding exemptions an
employee claims, the less tax you'll be required to withhold.
Technically, each withholding exemption frees a specified dollar
amount of wages from withholding. For 2001, the annual value of
a withholding exemption is $2,900. In other words, each
withholding exemption that an employee claims for 2001 will
effectively exempt $2,900 in annual wages from withholding.
Form W-4. Your employees claim their withholding
exemptions by filing with you federal Form W-4, Employees'
Withholding Allowance Certificate. One of the first things
you should do whenever you hire a new employee is to have the
employee fill out a W-4. If you don't have a valid W-4 on file
for an employee, you must treat the employee as being single
with no exemptions for withholding purposes. It's also good
practice to remind your employees at the beginning of each year
that they should file amended W-4s if their eligibility for
claiming withholding exemptions has changed since the filing of
their last certificates.
Permissible exemptions. On their W-4, your employees
can claim a withholding exemption for themselves, and for a
spouse if the spouse is not claiming his or her own exemption on
the spouse's W-4. An employee can also claim one exemption for
each child or other dependent claimed on his or her tax return.
Employees who expect to claim large amounts of itemized
deductions on their return may be entitled to additional
withholding exemptions.
Although your employees may not claim more
withholding exemptions than they're entitled to, they may
claim fewer than they're entitled to. Furthermore,
employees can request on their W-4 that you withhold additional
dollar amounts from their wages. This is often necessary if the
employee's spouse is employed, since the couple's combined tax
liability will usually be higher than the normal withholding
formulas provide.
No-tax-liability exemptions. An employee who
anticipates having no federal income tax liability for the year
may claim a complete exemption from withholding on Form W-4.
This exemption fully relieves you from any obligation to
withhold federal income taxes (but not FICA
taxes) from the employee's wages. To qualify for the
exemption, the employee (1) must have had no tax liability for
the prior year, (2) cannot be claimed as a dependent on another
person's tax return, and (3) cannot have more than $250 in
nonwage income such as interest, unless the employee expects to
have a total income of less than $750 for 2001. The exemption
from withholding lasts only to February 15 of the following
year, unless the employee files a new W-4 that renews the
exemption claim.
Sending the W-4s to the IRS. In general, you're under
no obligation to confirm that your employees are entitled to
each withholding exemption they claim on their W-4s, and you
don't have to file the W-4s with the government. However, if you
learn that an employee has improperly claimed exemptions, you
must inform the employee that the W-4 is invalid, request a new
W-4, and send the invalid W-4 to the IRS. You must also send to
the IRS copies of any W-4 on which an employee claims more than
10 withholding exemptions or on which an employee earning more
than $200 a week claims complete exemption from withholding.
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