Final answer:
To change an employee's withholding allowance, the owner must have the employee complete a new W-4 form. The allowance impacts the employee's net pay and their year-end tax liability. It is also part of both the employee's and the employer's contributions to payroll taxes and Social Security.
Step-by-step explanation:
As an owner, to change an employee's withholding allowance, you need to have the employee complete a new W-4 form. This form determines the amount of federal income tax to withhold from the employee's paycheck. When an employee wants to adjust their withholdings, whether to increase their take-home pay or to ensure they're not underpaying taxes throughout the year, they must update their W-4 form accordingly.
An employee's withholding allowance is significant because it impacts net pay and potential tax liability come the end of the year. If the allowance is set too high, the employee may enjoy greater paychecks during the year but could owe a substantial amount in taxes. Conversely, if the allowance is too low, more tax is withheld each pay period, potentially leading to a larger tax refund.
It's important to remember that when dealing with withholding taxes, employers and employees typically share the responsibility for funding Social Security and Medicare through payroll taxes. Additionally, employers pay certain employment taxes from their own funds, separate from the withholding of individual employees' wages.