Critical Tax Alert: W4s & Exempt Claims

Critical information: W4s & Employees Claiming “Exempt”

Each year you may have employees who claim “Exempt” on their W4s. I would like to point out a couple of key pieces of information regarding this election on the W4 that can be confusing to employers based on the IRS terminology.

What It Does Not Mean

First of all, it DOES NOT mean that the employee is exempt from federal income tax. Except in rare cases (like ministers or foreign employees), your employees will NOT be exempt from Federal Income Tax (or state).

This election on the W4 means that the employee certifies that they were entitled to a refund of all income tax last year and do not expect to earn enough this year to owe any Federal Income Tax and are claiming EXEMPT from withholding the tax.

What To Do

In these cases, you should block the withholding from occurring while leaving the employee subject to the tax code itself. We must still calculate their taxable wage and report it on their form W2. When they file their taxes, that is when the IRS will determine if they do owe tax on those wages.

What the IRS Stipulates

The IRS stipulates that employees who wish to remain exempt for the current year must turn in a new W4 for the current year to their employer – by February 15th – to remain exempt from withholding.

Employees who do not turn in a new form should be set to the default filing status of Single with Zero exemptions. (Note: this is usually the highest rate and will usually get a response from your employee to turn in a new form!)

Our Suggestions

We suggest that you review your W4s and solicit new forms from your employees that are listed as exempt from withholding.

For Our Clients

When you receive a W4 marked as “Exempt,” there are a couple of proper procedures, depending on which of our payroll systems you are using. For HRmony users, set the withholding status to “Block W/H” (NOT “exempt”).

If you are using, then there are two options. Enter 99 in the Primary Exemptions field or choose to “Override Tax Calc” on the details screen and leave the amounts at zero. If you do not enter this data, but one of our staff does, then they will know what to do!

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