When Can I Claim Exempt On My W-4?

Is your employee asking for a payroll exemption and you are facing trouble?

There comes a situation when you are running a company and your employee is thinking to claim an exemption from the withholding. I have written a complete user guide article that will help you out solve the issue.

Exemption From Withholding

First of all, I would like to throw some light about the term Withholding. Generally, it is a term for the amounts taken from the pay of employee pay for the income taxes of the State and also for FICA taxes which is the Social Security and Medicare.

There are sometimes employees who don't require to have the federal income taxes from their pay if their income is below a certain level or a certain requirement of the payment. The IRS allows its employees to claim an exemption from withholding in a particular year if both of the situations come true. The situation is given below:

There may be some employees out there who will be exempt: students, part-time workers, over 65 years of age or blind employees.

A withholding text is efficient and good for one year. It must be claimed each year and you must do it by February 15. After February 15, you cannot accept the claim of withholding exemption. After the day has passed, the employee will have to wait for the next year in order to claim the exemption.

How to Know If an Employee Is Exempt From Withholding

first of all, you have to keep in mind an important thing that you can change withholding based on the documentation given by the employee. When the employee gives you the correct form or forms, you have to continue to withhold state, federal, and local income taxes that are based on the most recent form which the employee has completed. Keep in mind that you can't take the employee's word on the claim of exemption.

In order to claim the exemption from withholding, the employee must complete a new W-4 form by February 15 of each year to change the withholding. The W-4 form contains the information about the marital status of the employee and the number of allowances that is claimed by the employee. You will calculate the withholding tax by gathering this information from the W-4 Form.

If an exemption is claimed, here is how the W-4 form should look:

  • Line 5: Total number of allowances - It will be blank
  • Line 6: Additional amount to be withheld - It will be blank
  • Line 7: The claim of exemption - It will show the word "Exempt."

Others Things You Need to Know About Claims of Exemption From Withholding

Just a claim of exemption from the withholding does not exempt the employee from paying their share of the FICA taxes. The employer and the employee must pay the FICA taxes. The employee withholding for the Social  Security stops at the Social Security maximum, but the contribution by the employee to Social Security an employer keeps continue for all pay.

Your claim of exemption for the federal incomes taxes has nothing to do with the employee's state income tax and local tax withholding. The employer has to check with the State and Local taxing agency to determine how this exemption works in those conditions. As I said in the above lines, until you are given the signed documents which are needed for the claim of exemption from the states or local taxes, you must continue to withhold these taxes.

If an employee already has a withholding which is taken from their pay during the year and wants to claim the exemption from withholding, then, in this case, you can't refund them this money. You will have to notify the employee of the withholding on the W-2 form at tax time. The employee can claim the withholding after doing this.

If You Can Help Employees Figure out If They Are Exempt From Withholding

your attorney might tell you that you are not supposed to help your employees but if are asked by an employee you can give them information to help them make a better decision for themselves. IRS Publication 505 has a vivid flow chart that will help your employee about whether to claim the exemption or not.

When an Employee's Claim of Exemption Is Wrong or False

If you think that the withholding exemption of your employee is not correct, you know that you can't change what has been done. But you can advise your employee that the exemption may be questioned by IRS. Keep in mind that you must use only the signed W-4 form to withhold from employee pay no matter what your employee claims.

You won't need to turn in W-4 forms to the IRS, instead, they will review an employee's claim for the exemption and then they will ask you to submit the W-4 form of an employee. There are sometimes some cases when the IRS feels the claim of exemption is not valid, in such cases, they send a "lock-in-letter" to your business, along with a copy for that employee. A lock-in-letter is used to lock in the employees withholding

This letter specifies the maximum number of withholding allowances that an employee can have. you must begin using this information to withhold federal income taxes from the employee's pay once you receive this lock-in letter. You can't change the withholding until you get the permission from the IRS; furthermore, you can't receive a new W-4 from the employee to change the withholding amount.