April 15 is commonly known as Tax Day, because that’s when most people’s federal and/or state income taxes are due. As such, your employees may be experiencing extra stress at this time of year. Consider offering them the benefit of financial wellness training by using basic tax training information in today’s Advisor.
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Although you are not in a position to advise employees about their taxes, they are likely to come to you with questions about tax matters relating to their employment, and you may be able to help them make more informed choices. The purpose of this session is to provide you with the information you will need to answer simple questions from employees about such things as W-4 forms and tax withholding, W-2 forms, basic tax filing guidelines, and steps they can take to avoid problems at tax time.
To prepare for the session:
- Obtain recent copies of relevant state and federal tax forms, schedules, and instruction booklets to display as samples during the session.
- Bring blank copies of W-4 forms, including state forms if your state has an equivalent withholding form, and worksheets as well as W-2 forms to the meeting so that participants can see them as you talk about them.
Payroll Deductions
Payroll deductions are amounts withheld from employees’ gross pay to make tax payments. Once withheld, the company sends the money to the government. The major deductions are for federal and state income tax. Federal income taxes are usually the largest portion of payroll deductions.
A percentage of employees’ earnings are also deducted for Social Security. The company contributes a matching amount. Another percentage of earnings is deducted for Medicare. Again, the company matches the employee’s deduction. The combined Social Security and Medicare deductions are known as the Federal Insurance Contributions Act (FICA).
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Form W-4
Everyone’s heard of the W-4 form. But let’s clearly define it. Form W-4 is a federal form that is used by the company to determine how much income tax to withhold each pay period from employees’ paychecks. All employees must fill one out when they are hired, and the company must keep these forms on file for as long as an employee works there.
It is important for employees to fill out their W-4s properly. If too much tax is withheld, they lose more money than they need to from their weekly paycheck—money they could be saving or spending for current needs. If too little tax is withheld, an employee may be penalized for underpayment of taxes.
W-4 worksheets. The W-4 form has three worksheets to help employees determine what their withholding should be for the upcoming year.
- All employees should use the Personal Allowance Worksheet to determine the number of allowances to claim on the W-4 form.
- Some employees may wish to further increase or decrease their withholding based on their personal circumstances. These employees will need to use the Deductions and Adjustments Worksheet.
- The Two-Earner/Two-Job Worksheet should be used by employees who have more than one job or who are married to a working spouse.
Allowances help determine an employee’s rate of withholding based on his or her individual circumstances. Each allowance reduces the amount of tax withheld. The more allowances employees claim on their W-4, the less income tax they pay. Allowances may be claimed based on several factors on the W-4 form.
Each employee is allowed a personal exemption from gross income. The exact amount of this exemption varies from tax year to tax year. If an employee is married and filing a joint return, two allowances are deducted from gross income. And employees are allowed another allowance for each dependent claimed on the W-4 form.
To claim filing status as “head of household,” employees must be unmarried and pay more than 50 percent of the costs of keeping a home for themselves and their dependents. Those who qualify for this status get to claim an extra allowance on the W-4 form.
Employees who have child or dependent care expenses, such as daycare for a child or young dependent under age 13, may claim an additional allowance on their W-4 form.
Some employees with children may also be able to reduce withholding by claiming allowances for the child tax credit. The number of allowances is calculated on the basis of the number of eligible children as well as income considerations.
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Adjustments and Deductions. Some employees may need to further adjust their withholding. For example, those with itemized deductions will need to take these deductions into account when filling out their W-4s. Itemized deductions, such as home mortgage interest, state and local taxes, charitable contributions, medical expenses that exceed 7.5 percent of adjusted gross income, and other miscellaneous deductions, can significantly decrease the amount of taxes owed.
Employees who have significant nonwage income, such as interest or dividend income from bank savings accounts, bonds, stocks and mutual funds, may need to increase their withholding to account for this extra income. Other adjustments to income that can affect the amount of withholding include items such as IRA contributions, alimony, and student loan interest.
Two-Earner Families and Two Jobs. Many employees will come from two-earner families and some may have second jobs. These factors will also affect withholding.
Employees who are married, have a working spouse, and together with their spouse earn more than $50,000 a year (this figure is adjusted regularly, so check the latest W-4 for the current figure when you conduct your training) should use the Two-Earner/Two-Job Worksheet to ensure that enough tax is withheld from their gross pay during the year. This is necessary because withholding by each employer is based on the tax bracket for an individual earning only the amount of pay from that one job. The combined income of both spouses puts them in a much higher tax bracket and more tax will most likely need to be withheld.
The same is true for employees who have two jobs. They should also use the worksheet to ensure that the information on their W-4 form is complete and accurate. Otherwise, they could face penalties.
Employees should review their W-4 form regularly to make sure that the information is still valid. It is a good idea for all employees to review their W-4 withholding rate every year and consider if there are any upcoming changes that could affect withholding. For example, changes in personal finances, such as increased nonwage income or refinancing a mortgage at a lower rate, may require changes on the W-4 form. Changes in personal circumstances, such as marriage, divorce, or more dependents, will also affect the information on the W-4 form.
In tomorrow’s Advisor, we’ll cover the W-2 form as well as basic tax filing information.