Claim Exempt Status on W-4

By federal law, employers are required to withhold federal income taxes from their employees’ paychecks. However, certain employees may have already paid more than their anticipated tax bill in some cases. 

If this applies to you, it’s better to claim exempt status on Form W-4 to let your employer know that you no longer need to pay federal income taxes. Doing this is pretty straightforward and allows you to increase your cash flow. After all, why should you pay taxes if you’ve already paid them fully?

Why claim exempt status on W-4?

Generally, filling out Form W-4 wrongly results in a federal income tax withholding rate that’s less than what’s necessary. The outcome of this is paying less than what you actually owe per pay period. However, at times, the opposite may happen.

Just as you should increase the withholding rate when you’ve underpaid taxes for a while, you should stop paying federal income taxes when you’re already overpaying. Before doing that, you might ask to say to yourself that you’ll get the excess amount back, so why bother? 

Although this has some truth to it, you can invest the money that you’d otherwise pay in taxes. Even if you redirect that amount to an interest-bearing account, you’ll have more at the end of the year than what you’d get in your refund. That said, it’s best to claim exempt status, only if it’s for a limited time though it should be. You’ll have the ability to invest that extra. 

How to claim exempt status from federal income tax withholding?

Claiming exempt status on Form W-4, Employee’s Withholding Certificate is straightforward. Though nothing about claiming exempt status is displayed on the form, you can do it under five minutes or so – faster than if you were to fill out the W-4 normally. 

Get W4 Form 2023.

Here is a step-by-step guide on how to make yourself exempt from federal income tax withholding.

Step 1: Fill out the personal information part. Make sure to check the correct box for your filing status.

Step 2: Write down exempt on the space between Part 4(c) of Form W-4 and Part 5. 

Step 3: Enter the completion date and your signature.

Once you fill out the copy like this, immediately give the copy to your employer so that this can take effect on the paycheck right away. From this point onwards, your employer won’t withhold federal income taxes, but Social Security and Medicare taxes will be subtracted regardless. Additionally, do the same for your state’s tax withholding form. Otherwise, your employer will continue to withhold state income taxes. 

Re-establishing federal income tax withholding

To make yourself subject to federal income taxes, all you need to do is fill out a brand new copy. This time, you won’t claim exempt status – obviously. 

Fill out Form W-4 usually with the correct information to your knowledge, and utilize the tax withholding estimator on the IRS website to compare. Once you get the results, see if it benefits you and you’re paying enough taxes to avoid the underpayment penalties. In a way, it’s completely fine if you underpay taxes, but to what degree matters. The same as you don’t want to overpay too much, you don’t want to underpay, which results in facing monetary penalties.