Payroll in Practice: 6.3.19

Practitioners’ questions are answered by a payroll and tax consultant who also is an enrolled agent licensed to practice before the Internal Revenue Service.

Question: The Washington, D.C., withholding certificate Form D-4 refers to the federal Form W-4 exemption as a qualification for claiming the exception in the District of Columbia.

What are the implications if an employee writes “exempt” on the D-4 and does not qualify for the federal exemption? And does a nonresident certificate overrule the D-4?

Answer: The District of Columbia has two exemptions with regarding withholding tax from wages: one for residents, the other for nonresidents.

The District of Columbia income tax applies only to residents of the District of Columbia. On that basis, nonresidents are not subject to D.C. income tax and, by extension, are not subject to D.C. income tax withholding.

Washington nonresidents must file Form D-4A, Certificate of Nonresidence, to establish that they are not subject to D.C. income tax withholding. To qualify, workers must have a permanent residence outside the District for the entire tax year and cannot reside in the District for at least 183 during the tax year. Military spouses may qualify as nonresidents under the Military Spouses Residency Relief Act.

Form D-4, Employee Withholding Allowance Certificate, has a check box to claim exemption from D.C. income tax, which may be a backup in case nonresidents are not aware of the withholding exemption or Form D-4A. The District also has Form D-40B, Nonresident Request for Refund, for workers to claim a refund of withheld tax rather than having to file a D.C. income tax return.

The reference to the federal Form W-4, Wage and Tax Statement, exemption is part of the requirement for a D.C. resident to qualify for exemption from D.C. withholding. Like the federal W-4 exemption, this is an exemption from withholding and not from taxes. The D.C. withholding exemption requirements are similar to the federal W-4 rules but contain an additional requirement that the employee also qualify for the federal W-4 exemption.

A D.C. resident may claim exemption from withholding of D.C. tax if the employee did not owe any D.C. income tax for the immediately preceding calendar year, had a right to a full refund of all D.C. income tax withheld for that year, does not expect to owe any D.C. tax for the current year, does not expect to owe any D.C. income tax, expects a full refund of all D.C. income tax withheld, and the employee qualifies for exempt status on federal Form W-4.

Note: A D.C. nonresident is exempt from income taxes; a resident is exempt from withholding but is subject to tax if taxable income reaches a certain amount. If a D.C. resident’s situation changes and the requirements for exemption would not be met during the year, a new Form D-4 that does not claim an exemption would have to be submitted to replace the D-4 claiming exemption. A D.C. resident would not be able to claim the exemption, even though otherwise qualified, if failing to qualify for the federal W-4 withholding exemption.

Some states have similar requirements for withholding exemptions. For example, Illinois requires that an employee be able to claim exemption from federal income tax withholding to claim exemption from state withholding. Illinois nonresidents who are residents of a state that has a reciprocal agreement may file Form IL-W-5-NR, Employee’s Statement of Nonresidence in Illinois, to claim exemption from withholding under the reciprocal agreement. Whether the Illinois employee can claim exemption from federal withholding has nothing to do with the exemption from tax on wages earned in Illinois under the reciprocal agreement.

A D.C. nonresident does not have to be exempt from federal income tax withholding to claim exemption from D.C. income taxes because the nonresident is exempt from D.C. tax regardless of whether the nonresidents can claim exempt from federal tax withholding. The reference to federal exempt status on the D-4 only applies to residents of D.C. who are claiming exemption from D.C. withholding.

Question: Our company wants to have employees electronically submit W-4 information. The printout from the electronic system does not provide an actual copy of the W-4, but lists the number of allowances and the marital status.

Are we required to have the employees prepare a paper copy so we have the complete form on file?

Answer: Employers do not have to obtain or store paper copies of Forms W-4, Employee’s Withholding Allowance Certificate, when the information is captured or stored electronically. However, the employer must supply a paper copy of the electronic Form W-4 when requested by the Internal Revenue Service.

The paper copy of the electronic form must provide the same information as a paper W-4, but does not have to be a facsimile. The employer also is to provide a statement that, to the best of the employer’s knowledge, the electronic W-4 was filed by the employee.

There also may be additional internal control risks and verification requirements with retaining paper and electronic copies of W-4s for each employee, such as unauthorized access to additional data points. A second concern is that the records might not match, especially if one of the forms was updated with new information.

Generally, an employer may obtain paper forms from the IRS or download forms from the agency’s website. Instead of using official paper forms, an employer may prepare a substitute form as long as the provisions are identical to those of the IRS form.

However, when an employer provides its own form, the employer must also provide employees with all the tables, instructions and worksheets that are contained in the W-4 in effect at that time. Additionally, the employer must comply with all revenue procedures relating to substitute forms.

Employers may establish systems for employees to file electronic W-4s. The electronic system must ensure that the information received is the same as that sent by the employee and that all occasions of employee access for filing a W-4 are documented. The design and operation of the system, including access procedures, must provide reasonable assurance that one accessing the system and filing the W-4 is the employee identified on the form.

The electronic filing must provide the employer with the same information as a paper W-4. For example, a check box that allows the employee to claim exemption from withholding for 2019 must be preceded by this statement:

“I claim exemption from withholding for 2019, and I certify that I meet both of the following conditions for exemption.

• Last year I had a right to a refund of all federal income tax withheld because I had no tax liability, and

• This year I expect a refund of all federal income tax withheld because I expect to have no tax liability.
If you meet both conditions, enter an X in this box.”

The electronic filing must contain a perjury statement that is to be signed by the employee and must contain the accompanying language that appears on the paper W-4.

The electronic program must tell the employee that the perjury statement must be signed and that the declaration is made by signing the W-4. The instructions and the language of the statement must follow the employee’s income tax withholding selections and precede the employee’s electronic signature.

The electronic signature is the final entry in the submission and it must identify the employee filing the electronic W-4 and authenticate and verify the filing. The words “authenticate” and “verify” have the same meaning as when applied to a written signature on a paper W-4. An electronic signature may be in any form that satisfies these requirements.

By Patrick Haggerty