Your employer most likely takes federal income tax, Social Security tax, Medicare tax and state income tax out of your paychecks. Depending on your location, you might pay local income tax and state unemployment tax as well. Family or financial obligations might require that you bring home a bigger paycheck each payday. Since tax withholding is a legal requirement, you can choose to have no taxes withheld from your paychecks only if you meet certain criteria.
Federal Income Tax Exemption
If you meet the requirements for exemption from federal income tax withholding, you can claim “exempt” on line 7 of IRS Form W-4. In this case, your employer shouldn’t take any federal income tax out of your paychecks. At the time of publication, you’re exempt if in the last year you had the right to a full refund because you owed no federal income tax, and if in the present year you expect a full refund because you don’t see yourself owing any tax.
State Income Tax Exemption
If state income tax withholding applies to you, whether you can claim exempt depends on your state revenue agency’s requirements. For example, Pennsylvania doesn’t require employees to fill out a state tax form for state income tax withholding purposes; instead, employers withhold at a flat percentage of all taxable wages. In this case, you can’t claim exempt from state income tax withholding. However, as an employee in Georgia, you can claim exempt from state income tax withholding on Form G-4 if you meet the requirements stated on the form.
Federal income tax withholding is based on the number of allowances and the filing status that you claim on the W-4, and on the IRS tax-withholding tables, also called Circular E. The more allowances that you claim, the less tax you pay; the fewer allowances that you claim, the more tax you pay. Go through your W-4 to see if you claimed all the allowances you’re entitled to and submit an updated form to your employer, if applicable. This process likely won’t result in zero withholding, but it can reduce your withholding amount.
Most employees aren’t exempt from Social Security or Medicare taxes, which are also called FICA taxes because the Federal Insurance Contributions Act mandates their collection. You’re exempt from FICA taxes if you’re a student at the school that you work for or if you’re a nonresident alien with a specific type of visa, such as F-1, J-1, M-1 or Q-1 visas. FICA taxes are withheld as flat percentages of your earnings -- unless you meet the specific requirements for exempt, these taxes are taken out of all of your paychecks.
If local income tax withholding applies to you, whether you’re exempt depends on the laws of the local municipality that enacts the tax. For example, at the time of publication, if you work in Pennsylvania, New Jersey and Alaska, you must pay state unemployment tax. There’s no exemption from state unemployment tax. Employers must withhold it from the paychecks of all employees who are required to pay the tax.