Significance

• Unlike Social Security and Medicare tax, which are based on flat percentages of an employee's pay, federal income tax depends on various factors; specifically, the employee's wages, allowances, filing status and the IRS withholding tax tables or Circular E. The employee states her filing status, allowances or other withholding conditions on the W-4. The employer cannot accurately compute the employee's federal income tax withholding without her W-4 information. Consequently, the IRS requires employers to withhold at the highest tax bracket of single with zero allowances if the employee fails to submit a W-4.
  
  

Determination

• The IRS requires an employee to complete a new W-4 and submit it to his employer whenever his personal or financial situation changes. Therefore, such changes can require the employee to submit more than one W-4 throughout the year. The amount varies by employee. For example, if an employee recently gained a dependent or got married, he likely needs to submit a new W-4 changing his allowances or filing status. The employee can make W-4 changes as often as necessary and provided they are legitimate.
  
  

Assistance

• An employee can use the IRS withholding calculator to determine if she needs to give her employer a new W-4. The calculator also helps her to avoid underpaying or overpaying federal income tax.
  
  

Regulations

• The personal allowances section of the W-4 includes the conditions under which an employee can claim allowances, which gives him a certain sum that lowers his taxable wages. Typically, the more allowances he claims, the less his taxable wages, and ultimately, his federal income tax withholding. An employee who claims allowances that he's not entitled to and submits W-4s frequently throughout the year for the purpose of reducing his tax withholding will likely owe the IRS when he files his tax return. Sometimes, the IRS asks employers to submit employee W-4s to the agency for review, particularly employees who claim an exorbitant amount of allowances. If the W-4 is invalid or false, the IRS sends the employer a letter, also called a "lock-in letter," advising the employer of the allowances the employee is allowed to claim. The employer must make the withholding according to the modification notice.
  
  

Penalties

• The IRS can charge employees who submit a false W-4 a penalty of $500. The criminal penalty for purposely completing and submitting a false W-4 is either a fine of up to $1,000 or imprisonment of up to one year, or both.