What does it mean to claim "exempt" on your W-4? Will you not be taxed anything on your paycheck?

Question

I work in collections and a couple of my co-workers are claiming exempt on their W-4, because are commission checks are low right now, but there keeping it that way even when we don't get our commission paycheck. Is this a smart thing to do?

Last year I got a refund, but I'm sort of confused what its asking me on the next one. "This year I expect a refund of ALL federal income tax withheld because I expect to have NO tax liability."

Answer 1

No, not a smart or even legal thing to do unless ALL of your federal withholding was refunded last year, and you expect it to ALL be refunded this year too.

The downside of filing exempt if you aren't is that you'll probably owe when you file your return, will probably be penalized, and might also be fined $500 for illegally claiming exempt

Answer 2

That is correct - they will withhold nothing for federal income tax.

You can only do that if 1) you had no federal tax liability last year - in other words, you got back all of your withholdings, and 2) you have no reason to suspect the same won't be true this year.

If your refund last year was equal to or greater than the amount in box 2 of your W-2, you qualify.  If not, then you are not.  If you do it, you might also want to do it for your state W-4.

Answer 3

"Exempt" means that no Federal or State income tax will be withheld from your paycheck. You'll still be paying Social Security - 6.2% and Medicare 1.45%.

Keep in mind though that if you end up tax liability you will be paying taxes and possibly some penalties. So think twice before making that decision.

Answer 4

Exempt means if a person does not have a tax liability for the previous year and does not expect to have one in the current year.  Exempt was designed for low wage earners such as high school or college students who only work a few weeks or months in a year.  It sounds like your co-workers should not be claiming "Exempt" and they may pay the price later.

Answer 5

Your co-workers are playing games with their W-4.  This can come back to burn them...if they end up owing taxes and the IRS realizes it's because of the W-4, they may find "lock in" letters being sent to their employer.  Such a letter usually states single/2 (or less) and prevents any further changes to the W-4 without the IRS's permission.  (This is also why may firms use an alternate method for taxing bonus/commission checks.)

The fact that you got a refund last year does not mean you didn't owe tax.  Check your refund and compare it to last year's W-2, did you get *all* of your money back?  What is your income this year?

If you are single (one exemption, standard deduction) and make less than $8950, then you can file exept.  If you are single and make more, you can't unless you expect to itemize or claim a dependent....

Answer 6

Here is what is stated on the W-4 form from the IRS.

I claim exemption from withholding for 2008, and I certify that I meet both of the following conditions for exemption.

--Last year I had a right to a refund of all federal income tax withheld bec ause I had no tax liability and

--This year I expect a refund of all federal income tax withheld because I expect to have no tax liab ility.

If you meet both conditions, write “Exempt” here

Note. You cannot claim exemption from

withholding if (a) your income exceeds $900

and includes more than $300 of unearned

income (for example, interest and dividends)

and (b) another person can claim you as a

dependent on their tax return.