Exemption from Withholding
If an employee qualifies, he or she can also use Form W-4 to tell you not to deduct any federal income tax from his or her wages. To qualify for this exempt status, the employee must have had no tax liability for the previous year and must expect to have no tax liability for the current year.
If the employee does have a tax liability for the tax year (even if they get a refund) they could be subject to fines for claiming exempt. An employee may be subject to a $500 penalty if he or she submits, with no reasonable basis, a Form W-4 that results in less tax being withheld than is required.
Maximum Allowances
In the past, employers had to send the W-4 of any employee claiming more than 10 allowances in to the IRS, to make sure that the employee was having enough income tax withheld. Now, the IRS is using its own data more, making this unnecessary. The IRS will send notification to your employer if you are only allowed to claim a certain number of allowances. Absent this, you may claim any number of allowances you like.
Maximum Exemptions
You may claim the number of exemptions on your tax return that you are legally entitled to. This is generally one exemption for you and one for your spouse if you are filing a joint return. You may also claim one exemption for each of your dependents who you are qualified to claim. You need to list the Social Security number of each dependent, to ensure that you are not claiming dependents fraudulently.
Calculating Allowances
Form W-4 contains worksheets to assist you in claiming the correct amount of allowances, so that you have the correct amount of tax withheld. You can account for all of your dependents on these forms, as well as the amount of your projected itemized deductions and tax credits that you are eligible for. Choose the amount of allowances that you claim carefully, as being over-withheld means you give the IRS a free loan, and under-withholding may result in penalties.
