Sense with Cents

An employer has a solemn task: to withhold — to be the tax collector — for the various tax agencies. While this topic applies specifically to the federal W-4 form, the principles apply to all withholding requirements.

Unless the employer is also a tax preparer or tax advisor for the employee (which should never be the case), the employer should examine the W-4 for validity and blindly follow the instructions the employee provides on their latest valid W-4. The employee has the ability, right, and responsibility to manage their own tax liability. It is not up to the employer to ensure the right amount gets withheld for the employee's particular situation — it is not the employer's job to make sure there is no bill at the end of the year. Of note, an employee is never required to provide a W-4; the IRS has instructions for employers on what default settings to use in that case.

In recent years, withholding — especially for those who used to claim fewer than two allowances on the pre-2020 W-4 form — often leaves employees with too little withheld. The reason is political, so if you have a mind to dive into politics, your congressperson and senator are the place to ask for an explanation.

The usual scenario: an employee files their tax return and gets a bill. They come to their employer complaining not enough was withheld. The employer should not comment — do not offer any tax advice. This is not a crisis (see There Is No Such Thing as a Payroll Crisis). State that you are using the proper calculations and withholding based on the instructions the employee provided on their latest valid W-4. Let them know they have the ability to alter their withholding by submitting a new W-4. If they need help with their W-4, they should consult their tax advisor or preparer. (For related withholding considerations, see Bonus Pay: Separate Check or Not?)

The other scenario is at the beginning of the year when an employee questions whether enough is being withheld. There are cases where zero is the proper amount to withhold, while many believe zero is always wrong. Self-checking is always a good idea — do not just trust your payroll software (not even mine), and as I discuss in To AI or Not to AI, do not just trust AI either. Compare to the tables in the current IRS Publication 15-T. Payroll software usually uses the exact calculations, so the tables — which are close enough for a given earnings range — will be close but may differ by a dollar or two. Interestingly, the IRS allows employers to create their own withholding calculations, as long as the result is within reason. A variance of nearly 10% would not have been unacceptable in the pre-PC era.

The W-4 is signed under penalty of perjury. This comes into play when an employee claims exempt from withholding. Some legitimately are — usually lower paid or part time employees. But if you have a full time, decently paid employee claiming they had no tax liability the prior year and expect none in the current year, under penalty of perjury, the employer — while having no enforcement responsibilities — may want to consider what that says about the employee's honesty. If they are dishonest on their W-4, they may be dishonest elsewhere. I am not saying accuse the employee, but a quiet employer-to-employee chat asking if they really meant to swear under penalty of perjury that they owe no taxes might help you retain an honest employee — and prevent them from trouble down the road.

And then there is the odd case. If you come across an employee claiming sovereignty, that is an entirely different scenario most employers choose to avoid. An employee who is not willing to accept the laws creates trouble and expense for the employer. There are legitimate cases of not being subject to withholding, such as a Native American working on a recognized reservation (with some other requirements), but the employer would already know this is possible and would not be shocked.