Exempt From Federal Withholding vs.  Exempt From Federal Taxable Wages   

Federal taxes are governed by the IRC (Internal Revenue Code) and are required to be deducted. The only control of how much is deducted would be by the employee’s submission of Form W-4. Per the instructions on the 2024 Form W-4, “To claim exemption from withholding, certify that you meet both of the conditions above by writing “Exempt” on Form W-4 in the space below Step 4(c). Then, complete Steps 1(a), 1(b), and 5. Do not complete any other steps.” Federal exemptions 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 single and zero until the employee updates their withholding information. For best practices, try running a report prior to the deadline that identifies employees whose exemptions will be expiring. Next, send a courtesy notification of the upcoming expiration date and steps to take in order for employees to update their withholding information. In addition, the IRS has an interactive Tax Assistant online to help employees to determine if their wages are exempt from Federal Income Tax Withholding. You can visit this online at Are My Wages Exempt From Federal Income Tax Withholding? | Internal Revenue Service (irs.gov).

This is determined from the payroll side. When an employee is set up to be “exempt from taxable wages” this means that no taxes are withheld from their pay and no taxable wages are reported to the agency. A few examples of when an employee is exempt from Federal taxable wages are: 1) Employers based in Puerto Rico are not required to withholding federal income tax nor required to report federal taxable wages. All other payroll taxes apply. 2) A current year deceased employee being paid wages after death, would be exempt from both Federal and State income tax.