What Happens When You File Exempt on Your Taxes?
Your paycheck taxes aren't magically calculated using a secret formula the Internal Revenue Service gave to your company's payroll division. They're directly influenced by the information you provided on your W-4 when you were hired. You may file exempt on your W-4 and avoid payroll taxes, but that doesn't end your tax liability altogether.
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Reporting Earnings
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To file exempt with your employer, you must have had zero tax liability in the previous year and anticipate another similar year. When you file exempt, your employer must still report your earnings to the IRS. You cannot claim exempt if you earn more than $950 or more than $300 in unearned income such as interest and dividends.
Other Withholdings
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Social Security and Medicare withholdings are still deducted from your paycheck when you claim exemption from income taxes. There is no income threshold to exempt yourself from these deductions.
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Exempt Filing
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At the end of the tax year, you are still required to report your income to the IRS even when you claim exempt status. You must file an exempt return that confirms the amount of income you received through the year did not exceed taxable levels.
Owing Income Taxes
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If you claim exempt on income tax deductions and earn more than $950, you are responsible for the amount that should have been withheld from your paycheck. That information is available on your W-2.
Penalties
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Taxpayers who claim exempt status on their taxes but do not qualify may be fined $500 in addition to any income taxes owed for the year.
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References
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