What is W-4 Exempt?

While it is not necessary for your employees to fill out a W-4 every year, we often get the question of whether an employee can file EXEMPT for federal withholding. So how do you know which employees are W-4 exempt?

What is Form W-4?

First, to review, IRS form W-4 is the form every employee needs to fill out and provide to their employer so that the employer can withhold the proper amount of federal income tax withholding from the employee's paycheck.

The form provides a worksheet that helps the employee determine their number of allowances. The more the number of allowances, the less income tax the employee is likely to owe, and therefore the less is withheld.

There are, however, circumstances that allow an employee to claim EXEMPT on their W-4. In order to do so, they must fill out a W-4 each year to make this claim.

What is W-4 Exempt?

In general, an employee can claim ‘exempt’ on their W-4 if they had no income tax liability in the previous year (and thus paid no federal income tax or either received or had a right to receive a refund of all income taxes paid).

The employee must also not expect to have a tax liability in the current year or expect to receive a full refund of all taxes for the current year.

To validate that estimate, the IRS looks at a few things such as whether the employee can be claimed on someone else’s return, the level of earned income in the upcoming year, and the level of expected unearned income.

See here for more information on who is W-4 exempt.

How to Administer W-4 Forms

Be wary of employees who submit W-4s to you indicating they are exempt. This may be a simple and misguided desire to postpone paying taxes which could lead the employee into trouble down the road and could bring unwanted attention to the employer from the IRS.

Be sure to have access to a correctly filled out W-4 from every employee and make sure that your employees understand the importance of accurately assessing the number of allowances they qualify for so that they have enough, but not too much, income tax withheld from their paychecks.

Get Help With W-4 Filing

Companies that are struggling with W-4 compliance and filing for their employees can contact PayNW today for help.