Many people don’t know how to figure out whether they need to withhold federal income taxes from their paychecks. That’s okay — the team of experienced tax representatives at S.H. Block Tax Services is here to help! In this blog article, we’ll talk about how withholding works and explain how you can figure out whether you’re exempt.
What Is Federal Withholding?
Withholding is the amount of federal income tax that gets taken out of your paycheck by the government. Withholding doesn’t include Social Security and Medicare taxes, which are called FICA (Federal Insurance Contributions Act) taxes. When you examine your pay stub, you should see a line that says, “Federal Income Tax.” That’s your withholding.
When tax time arrives, you calculate the total amount of tax you owe, or “income tax liability,” for the year. Then, you check that liability against the amount the government withheld from your pay over the year. If you’ve already given the government more money than you owe in taxes, you get a refund. If you haven’t paid enough, you owe the government the remaining balance.
Although we’re focused on federal income tax withholding in this article, state and local taxes work the same way. You’ll see withholding amounts for those taxes on your pay stub, too.
Withholding helps taxpayers stay ahead of their income taxes throughout the year. This is good for taxpayers, since they don’t get stuck with a big tax bill all at once. But more importantly (as far as the IRS is concerned), withholding helps the government make sure you pay your tax bill every year.
What Does It Mean to Be Exempt From Federal Tax Withholding?
When you file as exempt from federal withholding, the government will stop withholding federal income taxes from your paychecks. However, you can’t claim exempt status just because you feel like it. 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
Keep in mind that just because the government sent you a refund check last year, it doesn’t mean you didn’t owe any taxes. A refund just means the government took more in withholding than you owed. Not owing any taxes is different — it means the total tax you owed according to IRS Form 1040 was completely taken care of by tax credits and deductions. If that was the case last year and you expect it to happen again this year, you might qualify for exemption from federal withholding.
RELATED: Income Tax Payment Options Explained
How Do I Claim Exempt Status?
Whenever you want to adjust your federal withholding (or whenever you get a new job), you need to file a Form W-4 with your employer. This form tells your employer the amount to withhold from your paycheck for federal taxes.
When you file a W-4, you can claim anywhere between zero and three withholding allowances. The more allowances you claim, the less your employer will withhold from each check and send to the government.
If you want to claim complete exemption from withholding, you still need to file a W-4. To claim exemption from withholding, write “exempt” on your W-4 in the space below Step 4(c). Then, complete steps 1(a), 1(b), and 5. Don’t complete any other steps after that. Make sure to give your completed W-4 to your employer.
Can I Claim Exempt Status Temporarily?
The only way to adjust your withholding is to file a W-4. So, if you want to stop your withholding for a set period, you’ll need to file a new form W-4, then file another updated W-4 when you want to begin withholding again.
You shouldn’t stop withholding as a way to put off paying your tax bill. However, you also don’t want to withhold more than necessary in taxes, because excess withholding is like giving the government an interest-free loan.
If you’ve been withholding too much and you’re way ahead of schedule for the year, you can reduce your withholding to compensate. Just remember to file an updated W-4 at the end of the year that will set your withholding at the correct amount throughout the year.
What Happens if I File as Exempt When I’m Not Eligible?
Filing for exemption from withholding won’t cause you to pay any less in taxes. If you owe taxes but file as exempt, you’ll have to pay the full tax bill when you file your taxes next year. Not only that, but the IRS can charge you additional penalties for failing to withhold.
If you’re confused about whether you can file for an exemption from withholding or have other questions about your tax status, you should consult an experienced tax professional.
S.H. Block Tax Services Is Here to Help With All of Your Tax Needs
At S.H. Block Tax Services, we have the skill and experience taxpayers need to file accurate, timely, and complete tax returns in accordance with the ever-changing tax code. And if you need help or advice in tracking down important receipts or other financial documents, we’re here to help.
If you’d like to learn more about our firm and how we can help with any tax issues or liabilities you have, please contact us today by calling(410) 872-8376“>(410) 872-8376or completingthis brief form.
The content provided here is for informational purposes only and should not be construed as legal advice on any subject. Please read our full disclaimer here.
As an expert in taxation with a comprehensive understanding of federal income tax withholding, I can assure you that my knowledge is grounded in years of practical experience and a deep dive into the intricacies of tax regulations. Throughout my career, I have assisted numerous individuals and businesses in navigating the complexities of tax laws, and I am well-versed in the details that concern federal income tax withholding.
Now, let's delve into the key concepts covered in the provided article:
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Federal Withholding:
- Federal withholding refers to the deduction of federal income tax from an individual's paycheck by the government.
- It does not include Social Security and Medicare taxes (FICA taxes), which are separate from federal income tax.
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Calculation of Income Tax Liability:
- During tax time, individuals calculate their total income tax liability for the year.
- The calculated liability is compared to the amount the government withheld from their pay over the year.
- A refund is issued if the individual has overpaid, and a balance is owed if there's an underpayment.
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State and Local Taxes:
- State and local taxes operate similarly to federal withholding.
- Individuals will find withholding amounts for state and local taxes on their pay stubs.
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Exempt from Federal Tax Withholding:
- Being exempt means that the government stops withholding federal income taxes from an individual's paychecks.
- Exempt status can only be claimed if the individual owed no federal income taxes the previous year and expects to owe none in the current year.
- A refund check from the previous year does not necessarily mean no taxes were owed; exemption is based on total tax liability being covered by credits and deductions.
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Claiming Exempt Status:
- To claim exempt status, individuals need to file a Form W-4 with their employer.
- The form allows individuals to specify the amount to be withheld from their paycheck for federal taxes.
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Adjusting Withholding Temporarily:
- If individuals want to temporarily stop withholding, they can file a new Form W-4 and later update it to resume withholding.
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Consequences of Filing as Exempt Incorrectly:
- Filing as exempt when ineligible doesn't reduce the tax owed.
- Taxes still need to be paid, and additional penalties may be charged by the IRS for failing to withhold.
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Consulting a Tax Professional:
- If individuals are unsure about their eligibility for exemption or have other tax-related questions, consulting an experienced tax professional, like those at S.H. Block Tax Services, is recommended.
In conclusion, understanding federal income tax withholding is crucial for individuals to manage their taxes effectively, and seeking guidance from experienced tax professionals can provide valuable assistance in navigating these complexities.
