Employers should be aware of an important requirement regarding employees who claim exempt status on their federal W-4 forms. These employees must submit a new W-4 form each year by February 15 to maintain their exempt status. If they fail to do so, employers are required to withhold federal income tax as if the employee is single and claiming no withholding allowances.

This annual update is more than just a compliance matter—it helps make sure tax withholdings are accurate and helps prevent potential issues for both employers and employees.

Why Employers Should Take Action

1. Compliance with Federal Rules
   The Internal Revenue Service (IRS) requires employees claiming exemption from withholding to provide an updated W-4 form annually. Employers who neglect to request these updates could face compliance risks and potential penalties.
2. Changes in Employee Eligibility
   Circumstances change—employees who previously qualified for exempt status may no longer meet the criteria. By sending out new W-4 forms, employers encourage employees to reassess their tax situation and adjust if necessary.

Don’t Forget State Requirements

While the federal W-4 form is a key consideration, employers should also check their state’s requirements. Many states have specific rules regarding tax withholding and exemptions, and these can vary widely. Employers must stay informed about state-level updates to maintain compliance across the board.

Recommended Steps for Employers

1. 1. Identify Employees Claiming Exempt Status: Review your payroll records to determine which employees claimed exempt status in the previous year.
   2. Distribute New W-4 Forms: Provide these employees with new W-4 forms and clearly communicate the February 15 deadline for submission.
   3. Verify State Rules: Research your state’s withholding requirements to confirm whether additional updates or forms are needed.
   4. Monitor Compliance: Make sure employees who fail to submit a new W-4 form by the deadline are switched to the default withholding status (single, no allowances) to comply with IRS rules.

    

Updating W-4 forms for exempt employees is a straightforward yet critical task for employers at the start of the year. Taking proactive steps to remind employees, review state requirements, and maintain compliance not only supports smoother payroll operations but also fosters trust and accountability within the workplace. If you have questions or need assistance navigating federal or state withholding rules, consider consulting with our tax professionals or payroll specialists to help ensure you’re on the right track.