Your employer is required to have you fill out a W-4 form when you start work in order to determine the amount of estimated income tax to withhold from your paycheck. Federal law requires employers to withhold taxes for employees and only allows exceptions for specific circumstances.
TL;DR (Too Long; Didn't Read)
In order to file tax exempt for one paycheck, you must submit a new IRS Form W-4 with your employer and meet the IRS criteria of having no tax liability in the previous tax year and no expected liability in the current year.
Filing Tax Exempt for One Paycheck
If you want to temporarily stop tax withholding from your paycheck, you’ll need to file a new IRS Form W-4, Employee's Withholding Allowance Certificate, with your employer. However, the federal government uses a "pay as you earn" system for income taxes and expects workers to pay income tax throughout the year, so there are strict IRS requirements about who can say they are exempt from withholding on a W-4. Even if you qualify for an exemption from income tax withholding, money will still be withheld for Social Security and Medicare.
In order to claim an exemption from income tax withholding, you must meet two criteria. First, you must have had no tax liability in the previous tax year. Second, you must expect to have no tax liability in the current tax year. Even if you are planning on claiming exempt for one paycheck only, you need to satisfy these criteria.
Claiming Allowances Instead of an Exemption
The IRS may impose a penalty for underpayment of taxes if you have an income tax liability after claiming yourself as exempt from withholding on your W-4. To avoid this penalty, many taxpayers reduce the amount of withholding on their paycheck by increasing the number of allowances claimed on their W-4. Allowances anticipate both standard and itemized deductions you will be taking on your taxes. Increasing your allowance is a legal alternative to going tax exempt for a pay period.
Changes for 2018 Tax Withholding
For income tax withholding for the 2018 tax year, for returns filed in 2019, changes to tax law have defined new tax rates. The IRS has updated its W-4 withholding calculator to reflect the new rates, which went into effect in February 2018. Employees are encouraged to check their withholding amount with the updated calculator and file a new W-4 with their employer if withholding changes are required. It’s important to spend time trying to estimate the correct amount to withhold, or you could end up with a tax liability and possible penalties or a large refund that amounts to a free loan to the federal government.
- Complete a new Form W-4 when you’re ready to resume income tax withholdings. Your new form should reflect the number of allowances you’re claiming and your filing status so your employer can calculate the amount of federal and state income tax to deduct from your check. If you’re unsure how many allowances you should claim on the new form, use the IRS Withholding Calculator on the IRS website. This tool analyzes your income, number of dependents and filing status to select an appropriate number of allowances.
Catie Watson spent three decades in the corporate world before becoming a freelance writer. She has an English degree from UC Berkeley and specializes in topics related to personal finance, careers and business.