The onboarding process for new employees includes a lot of paperwork, and Form W-4 is typically part of the initial packet. Also known as the Employee’s Withholding Allowance Certificate, this form asks for basic information such as name, address, social security number and filing status.
Purpose of Form W-4
The primary purpose of the form is to determine the amount of federal income taxes that should be withheld from the employee’s wages. A worksheet provided with the form allows employees to set the number of personal allowances that payroll services will use to calculate income tax withheld from employee wages. Without a W-4 on file, the employee will be designated as a single tax filer with zero tax exemptions.
The usual practice is for companies to retain the W-4 until such time that employees file an updated form to report a change in status. Annual updates are not mandatory except in cases where employees claim exemption from withholding and meet the requirements for the exemption. However, it is good practice for businesses to keep employee records current at all times.
Updating Employee Records
Employees may go through various changes in the course of the year. A change of status due to marriage, divorce or death of a partner would affect the employee’s exemptions, deductions and credits. Some employees may remember to report this information to apply for or cancel health or life insurance coverages. However, reporting this information to payroll services is often overlooked and adjustments to withholding allowances are not made as needed. Updating the W-4 ensures that income taxes withheld from wages is neither too large nor too small. When the withholding amount is insufficient, employees may end up with a substantial tax liability or a lock-in letter from the Internal Revenue Service specifying the number of permitted withholding allowances.
The Payroll Services Reporting System
Businesses need to comply with employment laws related to reporting wages, benefits and payroll taxes. To do this, the business must have an Employee Identification Number or EIN, which will be used on all tax paperwork, including those generated by payroll services to report employee earnings.
In addition, the business must also apply for a state withholding account number, which should be part of the mandatory Business Tax Registration application. For companies with employees residing in various states, this account number must be obtained from each state. State Unemployment Insurance registration may be another multi-state requirement for businesses with operations in different states.
Given the complexity of the system, outsourcing your payroll processing to a provider with the ability to meet federal and multi-state compliance regulations will streamline the process. That’s why we offer a comprehensive payroll servicing package that is scalable to meet your needs regardless of the size of your company.