Generally, the IRS will issue a tax refund when you pay more tax than what is actually owed in that specific tax year.3 min read updated on February 01, 2023
Updated August 12, 2020:
Filing Exempt
If you are filing exempt for tax purposes, you will need to indicate as such on the Internal Revenue Service (IRS) Form W-4, which will estimate the amount that should be withheld from your paycheck depending on certain tax information that you provide. However, even if you only made $10 in the prior year, you cannot claim an exemption on your federal tax withholding. With that being said, someone who makes very little can still claim what are called “allowances” on his or her W-4 thereby reducing the amount that is withheld for tax purposes. Such allowances are based on your specific status, the number of dependents, and any other itemized deductions, i.e. property taxes, medical expenses, etc.
What Does Exempt Mean?
Generally, the IRS will issue a tax refund when you pay more tax than what is actually owed in that specific tax year. When you file exempt with your employer, however, this means that you will not make any tax payments whatsoever throughout the tax year. Therefore, you will not qualify for a tax refund unless you are issued a refundable tax credit. Come tax season, your employer will provide you with Form W-2, which identified the total amount of taxes that was withheld throughout the year. If your tax liability is less than the amount withheld, the IRS will issue you a tax refund for the difference.
Refundable Tax Credit
A refundable tax credit essentially means that you may still obtain a tax refund even if you had no tax liability during the tax year. These types of credits will ultimately reduce federal taxes that you may owe and can also provide a higher refund than the actual tax owed.
How to Claim an Exemption
The following two criteria must be met in order for you to claim an exemption on your W-4:
- In the prior year, you must have had a refund of ALL federal income tax that was withheld due to the fact that you had no tax liability
- For the current year, you anticipate a refund of all federal income tax that was withheld because you assume to have no tax liability.
Circ*mstances When You Can’t Claim Exempt
- If an employee makes at least $950 in the tax year and at least $300 of that income is from non-work related income, i.e. dividend distribution, then he or she can’t claim exempt on the W-4 form.
- If an employee will be claiming dependents on the tax return, then he or she can’t claim exempt.
- If an employee plans to itemize deductions, then they can’t claim exempt.
- If you are 65 or older or blind, you must look at IRS Worksheet 1-3 or 1-4 to verify if you are exempt.
Frequently Asked Questions
- I’m exempt, now what?
If you are in fact exempt, you will leave Box 5 on the W-4 Form blank. Box 7 will include the term “EXEMPT.”
- What if I claim exempt but am not eligible?
If you incorrectly indicate that you are exempt on the W-4, you will likely face a high tax bill after filing your return, in addition to tax penalties for claiming exempt when you are otherwise not allowed to do so. However, if you make a mistake and it was not done intentionally, you will not be penalized. Unfortunately, the IRS tends to know if someone is trying to use the system. For example, if you make $100,000 during the tax year and try to claim exempt, you will be penalized. However, if you make $5,000 in the tax year and claim exempt, the IRS will likely not penalize you. However, if you do receive a monetary penalty, you can try speaking to an IRS representative or even a tax attorney indicating that you made an honest mistake and are seeking help.
- I’m a student/seasonal part-time employee. Can I claim exempt?
No, you are not necessarily exempt. If you are a student, however, you are exempt from FICA taxes, also referred to as payroll taxes (i.e. Social Security taxes and Medicare taxes) as long are you are enrolled as a part-time student or full-time student.
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FAQs
To claim exempt, write EXEMPT under line 4c. You may claim EXEMPT from withholding if: o Last year you had a right to a full refund of All federal tax income and o This year you expect a full refund of ALL federal income tax.
How do you answer are you exempt from federal withholding? ›
You can claim exemption from withholding only if both the following situations apply:
- For the prior year, you had a right to a refund of all federal income tax withheld because you had no tax liability.
- For the current year, you expect a refund of all federal income tax withheld because you expect to have no liability.
To qualify for this exempt status, the employee must have had no tax liability for the previous year and must expect to have no tax liability for the current year. A Form W-4 claiming exemption from withholding is valid for only the calendar year in which it's furnished to the employer.
What are the two criteria for claiming tax exempt? ›
To be exempt from withholding, both of the following must be true:
- You owed no federal income tax in the prior tax year, and.
- You expect to owe no federal income tax in the current tax year.
When you file exempt with your employer for federal tax withholding, you do not make any tax payments during the year. Without paying tax, you do not qualify for a tax refund unless you qualify to claim a refundable tax credit, like the Earned Income Tax Credit.
How long can I go exempt without owing? ›
The Frequency of Going Exempt:
While going exempt is an option, it is subject to certain limitations to prevent abuse and ensure proper tax collection. According to the IRS, you can go exempt from tax withholdings as long as you meet specific criteria and don't exceed one year.
Should I say I am exempt from withholding? ›
You can only file as exempt for the tax year if both of the following are true: You owed no federal income taxes the previous year; and. You expect to owe no federal income taxes for the current year.
Is it better to claim 0 or exempt? ›
Claiming 0 on Your Taxes
If your goal is to receive a larger tax refund, then it will be your best option to claim 0. Typically, those who opt for 0 want a lump sum to use as they wish, like: Pay bills.
What is an example of a tax exemption? ›
Certain types of income, such as portions of retirement income and some academic scholarships, are tax exempt, meaning that they are not included as part of a filer's taxable income.
How to get the most out of your paycheck without owing taxes? ›
To receive a bigger refund, adjust line 4(c) on Form W-4, called "Extra withholding," to increase the federal tax withholding for each paycheck you receive. Tax withholding calculators help you get a big picture view of your refund situation by asking detailed questions.
In most cases, there are three simple requirements to determine whether a worker is an exempt employee under California law:
- Minimum Salary. The employee must be paid a salary that is at least twice the state minimum wage for full-time employment. ...
- White Collar Duties. ...
- Independent Judgment.
If you do not meet the requirements for tax exempt status, it is not advisable to claim tax exempt on one paycheck. Doing so can have consequences, including a potential tax bill and penalties. It's important to be honest on your tax forms and only claim tax exempt if you truly qualify [2].
What happens if I claimed exempt but don't qualify? ›
It's important to be certain of your eligibility before claiming a federal tax exemption. If you indicate you are exempt from withholding a portion of your income on your W-4 without meeting the requirements listed above, you may face a tax bill or penalties as a result of picking the incorrect withholding status.
What happens if you claim exempt all year? ›
"Exempt" only stops withholding. It does not change the amount of tax you owe. Your tax is calculated on your tax return, and if you had less withholding than your tax bill, you owe the difference in the form of a check or electronic payment due by April 15.
What should I put for extra withholding? ›
You can set up extra withholding for non-wage income
Just put the estimated total amount of this income for the year on Line 4(a) of your W-4 form, and your employer will calculate the proper withholding amount for each pay period. Don't include income from a side gig on Line 4(a).
What does it mean when they ask are you tax-exempt? ›
What does tax-exempt mean? Being tax-exempt means that some or all of a person's or business's income is free from federal, state or local tax. Tax-exempt organizations are typically charities or religious organizations recognized by the IRS. Internal Revenue Service.
What is tax-exempt in simple terms? ›
A tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the Internal Revenue Service (IRS), preventing them from having to pay income tax.
