What Does It Mean When My Paycheck Says That I'm Exempt From Federal Taxes?

by Lee Nichols

    If your employer shows you as exempt from federal taxes, it means that he is not withholding taxes from your paycheck. Although some employees are exempt, most are not. If you think your employer should be collecting taxes on your earnings, you must talk to your company's payroll department and possibly fill out another Form W-4 to show your new withholding allowances.

    Qualifying for Exemption

    If you had no tax liability in the prior year and you do not expect to owe anything in the current year, you might qualify to be exempt from federal withholding. You can claim exemption if your income is less than $950 and you are a dependent on another person's return. But you are not exempt as a dependent if your income is $950 or more and if at least $300 of that is from income not related to work, such as dividend or interest income. If your total income as a dependent is less than $5,950 and doesn't include more than $300 in unearned income, you can claim exemption. If you are blind or at least 65 years old, you must complete Worksheet 1-1 or 1-2 in IRS Publication 505 to determine whether you are exempt from federal taxes.

    Form W-4

    Your employer uses Form W-4 to document your personal allowances and, if possible, your exemption from federal taxes. You must complete a Form W-4 when you begin employment for a new employer and any time your information changes. You must file a new form by Feb. 15 for each year you are exempt. You must file a new W-4 by that date or your employer must withhold taxes from your paycheck.

    Claiming Exempt

    Enter your identifying information, such as your name, address and Social Security number, on Form W-4. Do not complete lines 5 and 6 and write "Exempt" in the box on line 7. Sign and date the form and return it to your employer. Your employer will stop withholding federal tax after receiving your completed Form W-4. If your situation changes after submitting the form to your employer so that you will owe tax, you must complete a new W-4 within 10 days showing your allowances and additional withholding, if any, and leaving line 7 blank.

    Considerations

    If you have not filed a W-4 with your employer showing that you are exempt from federal tax withholding, the payroll department might have made an error. Check with your employer or someone in the payroll department as soon as possible to correct the error. Even if your employer made a mistake, you are still responsible for paying the tax on your income. Consider specifying additional withholding on top of your regular withholding on a newly submitted W-4 to prevent a large tax bill when you file your return. Your federal tax exemption does not prevent your employer from withholding Social Security or Medicare taxes from your paycheck.

    Photo Credits

    • Paying Bills image by ne_fall_photos from Fotolia.com

    About the Author

    Specializing in business and finance, Lee Nichols began writing in 2002. Nichols holds a Bachelor of Arts in Web and graphic design and a Bachelor of Science in business administration from the University of Mississippi.

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