Blocked vs. Exempt
There is a difference between being “blocked from tax” and “exempt from tax.” From the employee’s perspective, blocked and exempt is used interchangeably meaning that they do not want federal or state income tax withheld out of their pay. You, as the payroll professional, should understand the difference between the two and how it impacts taxes for the employee and employer.
Blocked from tax
When an employee is blocked from either federal or state income tax, it means that no taxes are being withheld from their pay. The employee’s would indicate this via a paper form submitted into the payroll department or if your company has an employee self-service, they would update their taxing information online via your portal. Note: Federal blocks expire every year by a specific date in February per the Form W-4. If the employee has not updated their federal tax information by the deadline, payroll should default the employee to a single filing status. For best practices, it is always good to run a report which identifies employees who are blocked from federal income tax as early as November and send a courtesy notification of the expiration date and change that will occur.
Exempt from tax
This is determined from the payroll side in accordance with federal, state, and local tax rules. When an employee is set up to be “exempt from tax” this means that no taxes are withheld from their pay and no taxable wages are reported to the agency. For example, a current year deceased employee being paid wages after death, would be exempt from both Federal and State income tax. Failure to validate whether an employee should be set up for “exempt from tax” could result in doing a tax adjustment or a prior quarter amendment as well as a W2c.