what does it mean to claim exemption from withholding

To claim exemption from withholding means that an employee informs their employer not to withhold any federal income tax from their paycheck. This is done by submitting a completed Form W-4 with the word "exempt" written on it. The exemption can only be claimed if the employee had no federal income tax liability in the previous year and expects to owe no federal income tax in the current year. Social Security and Medicare taxes will still be withheld regardless of this exemption. It is important to note that this exemption applies only to the federal income tax withholding, not to other payroll taxes. Claiming exemption from withholding allows the employee to receive their pay without federal income tax being taken out throughout the year, which means no federal tax refunds will be issued unless eligible for refundable credits. However, if the exemption is claimed incorrectly, the employee may face a tax bill and penalties when filing their tax return. The exemption status has to be renewed annually with a new W-4 form if the individual still qualifies for it. In summary, claiming exemption from withholding means skipping federal income tax withholding from paychecks under specific eligibility conditions, but it carries risks if the conditions are not met. References:.