What Is Exempt From Withholding?

If your employer doesn't withhold enough from your paycheck, you could owe taxes at the end of the year.

If your employer doesn't withhold enough from your paycheck, you could owe taxes at the end of the year.

The federal income tax system is a pay-as-you-go system. That's one reason your paycheck looks smaller than you might think it should every payday. Your employer withholds taxes from your paycheck and sends it to the Internal Revenue Service on your behalf. You can tell your boss how much money to withhold by filling out your W-4 form. In some cases, you can claim to be exempt from withholding, and your employer won't withhold federal income taxes from your paycheck.


Form W-4 Employee's Withholding Allowance Certificate is the government form your employer uses to determine the proper amount of income taxes to withhold from your paycheck. It includes such information as your name, address, marital status and number of exemptions you are claiming. Your employer will withhold less if you claim married status than if you claim single, although you have the option of claiming married but withholding at the higher single rate. The more exemptions you claim, the lower your tax withholding will be. If you qualify, you can claim exempt status.

Exempt Qualifications

The IRS has two qualifications for claiming "exempt" on your W-4, and you must meet both. You must have had a right to a refund of all federal income tax withheld during the previous year because you did not have any tax liability, and you must expect a refund of all federal income tax withheld this year because you don't expect to have any tax liability. You can't claim exempt on your W-4 if you can be claimed as a dependent by another taxpayer, you have more than $300 of unearned income and your total income for the year exceeds $950.


It might be tempting to claim exempt from withholding because you get to keep more money from each paycheck. But if you miscalculate how much money you'll make for the year or how many deductions you'll have, you could be in for an unpleasant surprise come tax time. You don't want to overestimate your tax obligation and have your employer withhold too much or you'll just be giving the government an interest-free loan. You also don't want to underestimate your tax obligation and end up owing the government money. Your best bet is to accurately fill out your W-4 and keep it updated as needed.

Change As Needed

You probably had to fill out a W-4 when you first got hired, and you might not have thought of it since. After all, it's part of a whole stack of paperwork you had to fill out and sign. But if you've had any significant life changes -- such as a marriage, divorce, new baby or even a second job -- it would be a good idea to revisit your W-4. You can fill out a new W-4 as often as you like. Just be sure to check your pay stubs for the next few weeks to make sure your changes were implemented.

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About the Author

Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.

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