W-4

• New employees are required to fill out a Form W-4, Employee's Withholding Allowance Certificate. The completed Form W-4 includes the employee's name, Social Security number, home address and marital status. The form includes a worksheet to help the employee determine the number of allowances she is entitled to claim. This allows the employer to withhold the proper amount of federal income taxes from the employee's paycheck.
  
  

Exempt

• The IRS recognizes that not all employees will have a federal income tax obligation. An employee has the right to claim exemption from federal income tax withholding if she did not have any tax liability for the previous year and does not expect to have any tax liability for the current year. An employee who meets both of these criteria and does not wish to have any tax withheld from her paycheck must still complete the Form W-4, but instead of putting a number of allowances in Box 5 she would write EXEMPT in Box 7.
  
  

W-2

• Internal Revenue Service regulations require employers to file a Form W-2 for each employee who received pay for services rendered, regardless of whether the pay was in cash or a form of non-cash payment. The employer must file a Form W-2 for any employee for whom the employer withheld income taxes, Medicare taxes or Social Security taxes. The employer must also file a Form W-2 for any employee who claimed EXEMPT on their Form w-4, if income taxes would have otherwise been withheld.
  
  

Considerations

• The employer is bound to honor the employee's wishes as expressed on the Form W-4 unless the IRS notifies the employer of a withholding compliance problem. The employer is bound to follow IRS instructions regarding tax withholding over the wishes of the employee. An employee who submits a W-4 that provides less withholding than is necessary to meet her tax obligation, without having a reasonable basis for doing so, may be subject to a tax penalty of $500.