Withholding From Wages

Employers generally withhold federal income tax, social security tax, and Medicare tax from an employee's wages. If the employee claims exemption from withholding on Form W-4, Employee's Withholding Allowance Certificate, the employer will not withhold federal income tax. The exemption from withholding does not apply to social security or Medicare taxes.

Conditions for exemption from withholding. An employee can claim exemption from withholding for 2001 only if he or she meets both of the following conditions.

1. For 2000, the employee had a right to a refund of all federal income tax withheld because he or she had no tax liability.
2. For 2001, the employee expects a refund of all federal income tax withheld because he or she expects to have no tax liability.

Dependents. An employee who is a dependent ordinarily cannot claim exemption from withholding if both of the following are true.

1. The employee's total income will be more than the minimum standard deduction amount, which is $700 for 2000. (This amount may be higher for 2001.)
2. The employee's unearned (investment-type) income will be more than $250.

Exceptions. An employee who is 65 or older or blind, or who will claim adjustments to income, itemized deductions, or tax credits on his or her 2001 tax return, may be able to claim exemption from withholding even if the employee is a dependent. See the discussions in chapter 1 of Publication 505, Tax Withholding and Estimated Tax, under Exemption From Withholding for more information.

Example. Guy is 17 and a student. During the summer he works part time at a grocery store. He expects to earn about $1,000 this year. He also worked at the store last summer and received a refund of all his withheld income tax because he did not have a tax liability. The only other income he expects during the year is $275 interest on a savings account. He expects to be claimed as a dependent on his parents' tax return.

Guy is not blind and will not claim adjustments to income, itemized deductions, or tax credits on his return. He cannot claim exemption from withholding when he fills out Form W-4 because his parents will be able to claim him as a dependent, his total income will be more than the minimum standard deduction amount, and his unearned income will be more than $250.

Claiming exemption from withholding. An employee who meets both conditions described earlier under Conditions for exemption from withholding, must write "EXEMPT" in the space provided on Form W-4. The employee must complete the rest of the form and give it to his or her employer.

Renewing an exemption from withholding. An exemption from withholding is good for only one year. An employee must file a new Form W-4 by February 15 each year to continue the exemption.

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