Filing Exempt

If you are filing exempt for tax purposes, you will need to indicate as such on the Internal Revenue Service (IRS) Form W-4, which will estimate the amount that should be withheld from your paycheck depending on certain tax information that you provide. However, even if you only made $10 in the prior year, you cannot claim an exemption on your federal tax withholding. With that being said, someone who makes very little can still claim what are called “allowances” on his or her W-4 thereby reducing the amount that is withheld for tax purposes. Such allowances are based on your specific status, the number of dependents, and any other itemized deductions, i.e. property taxes, medical expenses, etc.

What Does Exempt Mean?

Generally, the IRS will issue a tax refund when you pay more tax than what is actually owed in that specific tax year. When you file exempt with your employer, however, this means that you will not make any tax payments whatsoever throughout the tax year. Therefore, you will not qualify for a tax refund unless you are issued a refundable tax credit. Come tax season, your employer will provide you with Form W-2, which identified the total amount of taxes that was withheld throughout the year. If your tax liability is less than the amount withheld, the IRS will issue you a tax refund for the difference.

Refundable Tax Credit

A refundable tax credit essentially means that you may still obtain a tax refund even if you had no tax liability during the tax year. These types of credits will ultimately reduce federal taxes that you may owe and can also provide a higher refund than the actual tax owed.

How to Claim an Exemption

The following two criteria must be met in order for you to claim an exemption on your W-4:

  • In the prior year, you must have had a refund of ALL federal income tax that was withheld due to the fact that you had no tax liability
  • For the current year, you anticipate a refund of all federal income tax that was withheld because you assume to have no tax liability.

Circumstances When You Can’t Claim Exempt

  • If an employee makes at least $950 in the tax year and at least $300 of that income is from non-work related income, i.e. dividend distribution, then he or she can’t claim exempt on the W-4 form.
  • If an employee will be claiming dependents on the tax return, then he or she can’t claim exempt.
  • If an employee plans to itemize deductions, then they can’t claim exempt.
  • If you are 65 or older or blind, you must look at IRS Worksheet 1-3 or 1-4 to verify if you are exempt.

Frequently Asked Questions

  1. I’m exempt, now what?

If you are in fact exempt, you will leave Box 5 on the W-4 Form blank. Box 7 will include the term “EXEMPT.”

  1. What if I claim exempt but am not eligible?

If you incorrectly indicate that you are exempt on the W-4, you will likely face a high tax bill after filing your return, in addition to tax penalties for claiming exempt when you are otherwise not allowed to do so. However, if you make a mistake and it was not done intentionally, you will not be penalized. Unfortunately, the IRS tends to know if someone is trying to use the system. For example, if you make $100,000 during the tax year and try to claim exempt, you will be penalized. However, if you make $5,000 in the tax year and claim exempt, the IRS will likely not penalize you. However, if you do receive a monetary penalty, you can try speaking to an IRS representative or even a tax attorney indicating that you made an honest mistake and are seeking help.

  1. I’m a student/seasonal part-time employee. Can I claim exempt?

No, you are not necessarily exempt. If you are a student, however, you are exempt from FICA taxes, also referred to as payroll taxes (i.e. Social Security taxes and Medicare taxes) as long are you are enrolled as a part-time student or full-time student.

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