Guide: Am I Exempt from Federal With Holding?

Updated on April 9, 2024
At a Glance:
  • Filing exempt on a W-4 means that you are claiming exemption from federal income tax withholding.

  • If you meet certain criteria, such as having no tax liability in the previous year and expecting none in the current year, you can indicate this on your W-4.

  • However, filing exempt does not exempt you from Social Security and Medicare taxes or state and local income taxes.

  • It is not illegal to file exempt, but it can lead to consequences if done improperly.

  • If you are eligible for a tax exemption, you can temporarily stop tax withholding by filing a new W-4.
  • Tight on cash? You might think about filing as exempt to stop tax withholdings. If your income is below IRS thresholds, you’re exempt and owe no tax. However, ensure honesty on tax forms. Claiming exemption without qualifying can lead to a big tax bill and penalties, so it’s vital to verify your exemption status before making changes. In this blog, we’ll take a deep dive into the tax exemption from federal withholding.

    How to Know if Are You Exempt from Federal Withholding

    If an employee is eligible, they can use Form W-4 to request no federal income tax deductions from their wages. To be exempt:

    1. The employee must have had zero tax liability last year.
    2. They must expect zero tax liability this year.

    This exemption lasts only for the year the form is given. For continued exemption the next year, the employee must:

    1. Provide a new Form W-4 claiming this status by February 15.
    2. If February 15 is on a weekend or holiday, the due date moves to the next workday.

    If there’s no new form by February 15, start taxing them as single or married but filing separately, without any other adjustments. If they give a new form after February 15, it applies only to future wages. You won’t refund any taxes previously withheld.

    What is Federal Withholding?

    Federal withholding is the government’s deduction from your paycheck for federal income tax, separate from FICA taxes like Social Security and Medicare. This deduction appears as “Federal Income Tax” on your pay stub.

    At tax time, you’ll compare your total yearly tax with what was withheld. Paying more than needed results in a refund; less means you owe. While this piece emphasizes federal tax, state and local tax deductions follow a similar pattern on pay stubs.

    Withholding helps taxpayers avoid large end-of-year tax bills and ensures the government gets paid regularly.

    What Does Filing Exempt on a W-4 Mean?

    Being tax-exempt means you aren’t required to pay certain taxes. This can be because your income falls below a specific threshold.

    Usually, employers automatically deduct taxes from your paycheck. This is called withholding tax. To guide your employer on how much tax to deduct, you complete a Form W-4. This form indicates the necessary amount to be withheld from your salary for tax obligations.

    Exemption from Federal Income Tax

    If you’re exempt from withholding, you don’t pay federal income tax throughout the year. Indicate this on your W-4. Although regular W-4s don’t expire, those claiming exemption must renew yearly. However, this exemption doesn’t cover Social Security and Medicare taxes. State and local taxes might still apply and you should review local regulations.

    How to Claim Exemption on Your W-4

    Want to claim an exemption on your W-4? Here’s a simple step-by-step guide:

    1. Fill Out the Basics: Complete lines 1, 2, 3, 4, and 7 on the form.
    2. Indicate Exemption: In Box 7, clearly write “EXEMPT”. This ensures no withholdings are taken from your upcoming paychecks.
    3. Remember the Expiry: Note that if you’re claiming exemption for 2023, it will expire on February 17, 2024.
    4. Certify Your Claim: To affirm you’re exempt, write “Exempt” on Form W-4 in the space below Step 4(c). Then, just finish Steps 1 and 5. Avoid filling out any other steps.
    5. Update Annually: If you’re exempt from withholding, remember to submit a fresh Form W-4 by February 16, 2025.

    Ensure you stay compliant and review your tax status each year!

    Who Should Be Filing Exempt on Taxes?

    To be exempt from withholding, you must:

    1. Have owed no federal income tax in the prior tax year
    2. Expect to owe no federal income tax in the current tax year

    If your total tax on Form 1040 is less than your refundable credits, you owe no income tax. To qualify for no tax liability, your income must be low enough that you won’t owe income tax.

    How Much Income for No Tax Liability?

    So, how much income results in no tax liability? In 2021, your annual income has to be lower than:

    • $12,400 (Single or Married Filing Separately)
    • $18,650 (Head of Household)
    • $24,800 (Married Filing Jointly or Qualifying Widow(er).

    If you are 65 or older, or if you are blind, different income thresholds may apply to you.

    If you need help determining if you are exempt from taxes, consult the IRS Publication 505. The publication has a flow chart and worksheets that can help you determine if you are exempt.  For personalized assistance, find a tax office nearest you.

    Can You Claim Exempt for One Paycheck?

    If something changes and you find you are eligible for a tax exemption, you may want to temporarily stop tax withholding from your paycheck. You’ll need to file a new W-4 with your employer. If you are no longer eligible for the tax exemption, remember to file another W-4 to enable your employer to withhold tax from your paycheck again, so that you make all of your tax payments.

    Is Filing as Exempt Illegal?

    Filing as “exempt” on your W-4 is legal if you qualify. However, Social Security and Medicare taxes are still deducted by employers. Incorrectly claiming exemption can lead to IRS issues, potential owed taxes, and penalties. It’s crucial to ensure you genuinely qualify.

    What Happens If You File Exempt and Are Not Eligible?

    Claiming exemption on your W-4 without eligibility can lead to a hefty tax bill and potential penalties. If the IRS disputes your exemption, they’ll send guidance on proper withholding. You can contest it, but if unsuccessful, your employer will follow the IRS’s advice.

    Read More

    Final Thoughts

    Hopefully, these guidelines can help you determine are you exempt from federal withholding.

    If you earn less than the income tax thresholds laid out by the IRS, you do not owe any tax. If you do not owe any tax, your employer should not withhold money from your paycheck to pay the IRS on your behalf.

    You can stop this withholding by filing for an exemption from withholding on your W-4. It is not illegal to file as exempt if you are eligible. If you lie about you

    Understanding Federal Withholding and Exemption FAQ

    Below, you will find some common questions about federal withholding and exemptions and their answers.

    How do I indicate that I am exempt from federal withholding?

    To indicate you’re exempt from federal withholding, follow the guidelines provided on your W-4 form.

    Should I claim an exemption from withholding?

    Only claim exemption if you meet the IRS criteria. Ensure you had no tax liability in the previous year and expect the same for the current year.

    Which is better: claiming 0 or exempt?

    Claiming 0 means the most tax will be withheld from your paycheck, while exempt means no federal tax will be withheld. The better choice depends on your expected annual tax liability.

    If no federal taxes were withheld, can I get a refund?

    You can only get a refund if you’ve overpaid taxes. If no federal taxes were withheld, there’s nothing to refund unless you qualify for tax credits.

    What are the consequences of claiming exempt on my W-4?

    If you claim exempt without being eligible, you might owe a significant amount of taxes at year-end and potentially face penalties.

    What if I claim exempt just for one paycheck?

    If you claim exempt for a single paycheck, no federal taxes will be withheld for that period. Ensure you adjust your future withholdings to cover your yearly tax liability.

    Is claiming 0 the same as exempt?

    No, claiming 0 means maximum withholding, while exempt means no withholding.

    On my W-4, should I claim 0 or 1?

    Claiming 0 results in more withholding than claiming 1. Your decision should reflect your tax situation and preferences regarding larger paychecks vs. larger refunds.

    What happens if I claim 1 instead of 0?

    Claiming 1 means slightly less tax will be withheld than if you claim 0, resulting in bigger paychecks but potentially smaller refunds.

    Why do I owe taxes when claiming 0 and being single?

    Even if you claim 0, other factors, like additional income sources or not having enough withheld, can result in a tax liability.

    Is claiming 0 sufficient for my tax situation?

    Claiming 0 will lead to maximum withholding, which might cover your tax liability, but always review your individual situation or consult a tax professional.

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    Frank Gogol

    I’m a firm believer that information is the key to financial freedom. On the Stilt Blog, I write about the complex topics — like finance, immigration, and technology — to help immigrants make the most of their lives in the U.S. Our content and brand have been featured in Forbes, TechCrunch, VentureBeat, and more.

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