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When does an employee qualify as exempt from withholding?

March 19, 2013

Article courtesy of SBAM Approved Partner AdvanceHR

When it comes to filling out W-4 forms, employees don’t always take the task seriously. Sometimes, they simply write “exempt” on their W-4s or claim a false high number of withholding allowances to ensure that no federal or state tax is withheld.

When helping staff members fill out W-4 forms, they may ask if they can be exempt from federal withholding. Here are some points to keep in mind:

  • Did the employee have a tax liability in the previous year? If he or she received a refund of all federal income tax paid (or had a right to a refund), the employee had no liability and can claim to be exempt.
  • Does the employee expect to have a tax liability this year or expect to qualify for a refund of all federal income tax paid? To make this determination, the W-4 worksheet asks:
    • Can the employee be claimed on someone else’s income tax return this year (such as a parent)?
    • What level of income does the employee expect this year?
    • In addition to earned income, does the employee expect to receive more than $250 in unearned income (such as interest or dividends) this year?

If after reading the guidelines, your employee decides he or she is exempt, you may have to send a copy of his or her W-4 to the IRS.

This is required when an employee claims more than 10 withholding allowances, or exemption from withholding when his or her taxable wages would normally be more than $200 per week.

Important: An “exempt” W-4 is only valid for one year. If your payroll includes employees who claim to be exempt, require them to see you every January to fill out new W-4s so that you can mail them to the IRS by the required deadline.

Still have questions?  SBAM’s experts can help.

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