Form W-4 Explained for Small Employers: Steps 1 to 5

Form W-4, the Employee's Withholding Certificate, is how an employee tells you how much federal income tax to withhold from each paycheck. Since the 2020 redesign, the form no longer uses withholding allowances. Instead, it works in dollar amounts across five steps: filing status, multiple jobs, dependents and credits, other adjustments and the signature. As the employer, your job is to collect it, apply it exactly as completed, and keep it on file.

This guide follows the 2026 Form W-4 and explains which entries actually move the withholding number.

Step 1: Personal information and filing status

The employee enters name, address and Social Security number, and checks one filing status:

• Single or Married filing separately
• Married filing jointly or Qualifying surviving spouse
• Head of household

Effect on withholding: filing status picks which set of withholding tables applies. Married filing jointly has the widest brackets and the largest built-in standard deduction, so it generally produces the lowest withholding for the same pay; single produces the highest.

Step 2: Multiple jobs or spouse works

Step 2 is for employees who hold more than one job at the same time, or who file jointly with a working spouse. Without it, each employer withholds as if that job were the only income, which often leads to too little withholding overall. The employee picks one option:

• (a) use the IRS online Tax Withholding Estimator and enter the result in Step 4;
• (b) use the Multiple Jobs Worksheet and enter the extra amount in Step 4(c);
• (c) if there are only two jobs in total, check the box on the W-4 for both jobs.

Effect on withholding: the checkbox in Step 2(c) tells your payroll system to use the higher-withholding table for that employee. Options (a) and (b) show up as an extra amount in Step 4 instead. The form asks the employee to complete Steps 3 to 4(b) on only one W-4, ideally the one for the highest-paying job.

Step 3: Claim dependents and other credits

For the 2026 form, employees whose income will be $200,000 or less ($400,000 or less if married filing jointly) may enter:

• $2,200 for each qualifying child under age 17;
• $500 for each other dependent;
• plus any other tax credits they expect, such as education credits.

Effect on withholding: the Step 3 total is an annual credit amount. Payroll divides it by the number of pay periods in the year and subtracts it from the tax that would otherwise be withheld from each paycheck. A larger Step 3 amount means less withholding, and it can bring federal withholding to zero on smaller paychecks.

Step 4: Other adjustments (optional)

4(a) Other income

Expected income that is not from jobs and has no withholding, such as interest, dividends or retirement income. It increases withholding.

4(b) Deductions

Deductions beyond the standard deduction, calculated on the Deductions Worksheet that comes with the form. If left blank, withholding assumes the standard deduction. The 2026 worksheet includes new lines for qualified tips, qualified overtime, passenger vehicle loan interest and the additional deduction for people age 65 or older, each with its own income limits. Step 4(b) reduces withholding.

4(c) Extra withholding

A flat dollar amount to withhold from each paycheck on top of the calculated amount. It is per pay period, so the annual effect depends on your pay frequency.

Step 5: Signature

The employee signs and dates the form. According to the form itself, a W-4 is not valid unless it is signed. The employer section at the bottom asks for your business name and address, the employee's first date of employment and your EIN.

Claiming exemption from withholding

An employee may claim exempt for 2026 only if they had no federal income tax liability in 2025 and expect none in 2026. To claim it, they complete only Steps 1(a), 1(b) and 5, following the instructions on the form. Exempt status covers only one year: the 2026 form says a new Form W-4 must be given by February 16, 2027 to keep it. If no new form arrives, follow the IRS instructions in Publication 15 for resuming withholding. Exempt status stops federal income tax withholding only; Social Security and Medicare are still withheld.

What employers must do

1. Ask every new hire for a W-4 when they start, along with any state withholding form your state uses.
2. Apply it as completed. You do not decide the employee's filing status or dependents, and you should not give tax advice on how to fill it in. Point employees to the IRS Tax Withholding Estimator if they have questions.
3. Handle a missing W-4 correctly. The IRS says a new employee who does not give you a Form W-4 is treated as a single filer with no other adjustments (IRS W-4 FAQs).
4. Keep pre-2020 forms in place. Employees hired before 2020 are not required to give a new form just because of the redesign; you keep withholding from their most recent W-4. Payroll systems use the computational bridge in Publication 15-T to handle older forms.
5. Accept updates. Employees can give you a new W-4 at any time, for example after marriage, a new child or a second job.
6. Keep the records. The IRS asks employers to keep copies of employees' withholding certificates with other employment tax records for at least four years after filing the fourth-quarter return for the year (IRS employment tax recordkeeping).

Common W-4 mistakes on small payrolls

• Entering the Step 3 total as a per-paycheck amount. It is annual. Payroll divides it across the year.
• Treating Step 4(c) as annual. It is per paycheck.
• Ignoring the Step 2 checkbox. It changes the tables used, and missing it under-withholds.
• Using the wrong pay frequency. Withholding is annualized using the number of pay periods, so a wrong frequency throws off every calculation.
• Forgetting state forms. Many states have their own withholding certificate; the federal W-4 does not always cover state tax.

Where the W-4 shows up on a pay stub

The W-4 is not printed on the stub, but its effect is: the federal income tax line. Some stubs also show the filing status used. If an employee asks why their federal withholding changed, the first thing to check is whether a new W-4 took effect that pay period.

Apply W-4 settings automatically

When you create a pay stub on PayStubNest, you enter the employee's W-4 choices (filing status, Step 2 checkbox, Step 3 and Step 4 amounts) and the payroll engine calculates federal and state withholding for the pay frequency you select. See our guides and FAQ for more payroll setup help.