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How to Help Small Business Employees Fill out a W4 for Federal Tax Withholding

April 1st, 2024 | 6 min. read

By Bret Asmussen

With so many changes to the federal Form W-4 in 2020 for federal withholding, you may still be getting some questions from your employees. 

This is especially true if you’re a small business that has employees who may not have any federal withholding – like if you have employees making minimum wage or who work very few hours – or both.

At CSI Accounting & Payroll, we’ve worked with small businesses for over 50 years. We’ve heard plenty of questions about tax forms and other paperwork related to payroll. Lately, small business owners have asked us:

  • Why does my employee say they have no federal withholding? Doesn’t everybody have it?
  • Why is it important to have the correct federal withholding?
  • Can CSI help me with my workers’ W-4s?

Blog - How to Help Small Business Employees Fill out a W4 for Federal Tax Withholding

Does Everyone Have Federal Withholding?

Doesn’t everybody have federal withholding? Kind of! It depends on your income level.

If you have an employee who has no federal withholding, that means they’re in the income threshold that won’t owe any taxes or they have claimed exempt on their W-4, and they also may not have to file a tax return. The chances of this are higher if they only work a handful of hours and/or get paid a very low wage. There is a tax table that shows if they fall into this area.

They don’t want to have any federal withholding if they don’t need it to be taken out!

The way that payroll software works is when you process payroll, it annualizes wages for withholding tax calculations. If the total income for the year is under the tax-owing income threshold, it won’t take federal withholding out of that paycheck.

What happens if they get a raise or start working more hours partway through the year and that boosts them into the tax-owing threshold? Most payroll software will still work the same way and annualize each pay period, but only for the current pay period. It won’t recalculate based on what was earned previously. This likely will also put your employees over the threshold requiring them to file a federal tax return.

Next, let’s get into the federal Form W-4.

The Importance of Having the Correct Federal Withholding

While many states kept their Forms W-4 the same, the federal government changed their Form W-4 starting in 2020. For most employees, it’s recommended – but not required – to fill out the W-4 every year and whenever they go through a major change, such as getting married or having children. 

However, if an employee has claimed exemption in the past, it is required for them to fill out a W-4 to maintain their exempt status each year by February 15th. 

As the employer, you should bring them new forms each year and keep these forms to show why taxes weren’t taken out of the employee’s paychecks. Why does this matter? It’s a way to protect yourself.

We know of a business that hired someone who was exempt, but he continued to work at the business for 10 more years without being asked to fill out a new W-4. 

When he finally filed his tax returns, he found out that his withholding status should have changed years prior. He was on the hook for the money he owed, and the government went after the employer for not bringing him opportunities to fill out new W4s and change his status. Don’t let that happen to you!

Can CSI Help With Your Employees’ W-4s?

This might seem like a simple question, but it’s not. There can be a lot that goes into income tax preparation, and that’s not something our payroll department handles for employees of our business clients. We don’t know your workers’ personal situations to help them decide how to fill out tax forms.

So, how can we help?

We can explain the basics of the forms to you if you would like to try to advise your employees based on the personal information they want to share with you. The second page of the W-4 lists specific instructions for each section, but we’re happy to elaborate further if needed.

If questions from your employees get into more complex personal situations, it would be wise to have them contact their tax preparer for advice.

We can also recommend tools for your employees to use to forecast their finances. We really like the IRS’s tax withholding estimator, and we find Paycheck City’s paycheck calculator to be extremely accurate as well.

Other than that, just like we discussed earlier in this article, our payroll software annualizes wages each pay period to determine taxes to withhold. We also factor in the withholding allowances shown on their completed Form W-4.

Ultimately, we do whatever we can as your payroll provider to ensure your employees have accurate withholdings based on their completed W-4s, pay rates, and hours worked.

Stop Worrying About Payroll Taxes

Now that you know about who has federal withholding, why it’s important to have accurate tax forms and withholdings, and how CSI can help advise on W4 basics and ensure accurate withholdings based on the information your employees provide, are you ready to check out payroll services?

If so, please consider CSI Accounting & Payroll! To see if we can be a good fit for your business, click the button below for a free consultation:

Not ready to talk? That’s okay! First, learn more about the cost of a payroll service by clicking the image below:

Bret Asmussen

Bret began working at CSI in 2007. Over the years, he worked his way up from an entry-level marketing position to his current role of manager of our payroll service. Bret is largely responsible for the growth of our payroll division over the last several years. His previous experience and knowledge in sales and management are exemplified in his success here. Bret has a college degree in Computer Networking, a skill that certainly comes in handy in an office environment. Bret is also a Certified Payroll Professional (CPP). Fun Fact: As an active duty member of the United States Marine Corps, he served in Operation Desert Shield and Desert Storm.