Q & A – When can an employee claim to be exempt from income tax withholding?

Q: businessmen-outside When can an employee claim to be exempt from income tax withholding?

A: To be exempt, the employee must certify that he or she meets all of the following criteria:

  • Had a right to a refund of all federal income tax withheld in the previous tax year because the employee had no tax liability.
  • Expects to have no tax liability in the current year.
  • Cannot be claimed a dependent on someone else’s tax return IF the employee’s income will exceed $900 and will include more than $300 of nonwage income (e.g., dividends, interest) in the current tax year.

High school and college students are not automatically exempt from withholding, even though their prior year’s withholding was totally refunded. They must meet all of the tests for exemption that other employees are required to meet, including the $950 limit on income for dependents.

A claim of exemption from withholding is effective for one year, and a new W-4 attesting to the exempt status must be filed by February 15 of the following year. Otherwise the employer must begin withholding at single and zero allowances. If, after filing a W-4 claiming exempt from withholding, the employee realizes that she/he will incur tax liability for the current year because any of the tests are no longer met, the employee has ten days from that point to file an amended W-4 form.