Completing Form W-4
When you hire an employee, you must have them complete a Form W-4 (Withholding Allowance Certificate).
This form reports:
- Marital status
- Withholding allowances
- Any additional withholding amounts
If an employee fails to provide a properly completed Form W-4, you must withhold federal income taxes as if the employee were single with no withholding allowances.
Claiming Exemption from Withholding
An employee may use Form W-4 (lines 1–4 and 7) to claim exemption from withholding, but only if:
- They had no federal tax liability last year, and
- They expect to have no federal tax liability this year.
Important:
If someone claims the employee as a dependent, additional restrictions may apply.
Reminder:
- A W-4 claiming exemption is valid for one calendar year.
- To continue exempt status, employees must submit a new Form W-4 by February 15 each year.
- Without a new W-4, you must withhold taxes as if the employee were single with no allowances—unless you have an earlier valid W-4 on file.
Handling Invalid Forms W-4
A Form W-4 is invalid if:
- The employee changes or removes certification language.
- The employee indicates the form is false or misleading.
If you receive an invalid W-4:
- Do not use it to determine tax withholding.
- Notify the employee and request a new, valid Form W-4.
- If the employee fails to provide a valid form, withhold as single with no allowances—unless a prior valid W-4 is on file.
Dealing with “Tax Protester” Claims
Some employees may incorrectly claim exemption based on “tax protester” arguments, such as:
- Taxes are voluntary.
- Wages are not income.
- Only federal employees owe taxes.
- Religious or moral objections under the First Amendment.
- Fifth Amendment rights against self-incrimination.
- Other constitutional claims under the Fifth or Thirteenth Amendments.
The IRS classifies all of these arguments as frivolous and warns that taxpayers using them may face substantial penalties.
Can Churches Be Sued by Employees Over Withholding?
Case Example:
In Fuce v. Hoffman, 2010-1 U.S.T.C. ¶50,205 (E.D. Pa. 2010):
- A new employee (“Alan”) claimed to be exempt based on tax protester claims.
- The employer properly withheld payroll taxes.
- Alan sued for a refund and $250,000 in punitive damages.
- The court dismissed the lawsuit, labeling it frivolous.
Key Point:
Employers must comply with federal and state payroll withholding laws, regardless of an employee’s personal beliefs.
Payroll Tax Withholding: Church Responsibilities
General Rules
- Employers must withhold income, Social Security, and Medicare taxes from employees’ wages.
- Churches do not withhold Social Security or Medicare taxes from ministerial wages.
Special Rules for Ministers
- Ministers treated as employees may elect voluntary withholding of income taxes by submitting a Form W-4.
- Ministers are always self-employed for Social Security and Medicare purposes—even with voluntary income tax withholding.
- Ministers may request additional withholding to cover self-employment taxes (reported on line 6 of Form W-4).
Churches Exempt from Social Security and Medicare Taxes
- Churches that filed Form 8274 timely with the IRS are exempt from the employer’s share of Social Security and Medicare taxes for lay employees.
- Note:
Even if exempt from these taxes, churches must still withhold federal income taxes.
Handling Form W-4s
- Employees must submit a completed Form W-4 before withholding begins.
- If no Form W-4 is submitted, withhold as if the employee is single with no allowances.
- Employees may claim exemption only by completing lines 1–4 and 7 and signing the form.
- Exemptions expire annually and require a new W-4 by February 15 each year.
Encourage Annual W-4 Review
Advise employees (including ministers) to review their W-4 annually because:
- Life changes—such as a birth, marriage, pay raise, or major medical expenses—may affect withholding.
- Recent tax law changes may lower overall tax liabilities.
Outdated W-4s can cause withholding to be too high or too low.
Responding to IRS Requests for Form W-4
If the IRS requests copies of W-4 forms:
- Send them to the address provided in the notice.
- After submission, continue withholding based on the W-4 unless the IRS issues a lock-in letter specifying different withholding instructions.
Final Note: Frivolous Tax Protester Claims
Churches should never accept frivolous arguments against withholding obligations.
The only valid way for an employee to claim exemption is by properly completing and signing Form W-4 (lines 1–4 and 7).
