What should an employer do when an employee claims exempt on Form W-4?

The employer's responsibility

An employer can be penalized if it accepts an invalid Form W-4. A Form W-4 is invalid if, by the date an employee gives it to you, he or she indicates in any way that it is false. This might occur if an employee were to tell his employer that he is claiming exempt from withholding despite the fact that he doesn't qualify because he is protesting the government's collection of taxes.

A Form W-4 can also be invalid if the employee writes on the form other than the entries requested. For someone claiming exemption from withholding, additional writing beyond the information required by lines 1, 2, 3, 4, and 7 and a signature would make the form invalid.

If you receive an invalid Form W-4, do not use it to determine federal income tax withholding. Instead, tell the employee that the form is invalid and ask for another one. If he or she doesn't give you a valid one, your organization must withhold taxes as if the employee was single and claiming no withholding allowances, according to the Internal Revenue Service (IRS). However, if you have an earlier, valid Form W-4 for the employee, you should withhold as you did in relation to that form.

Complete exemption does not, by itself, indicate that a Form W-4 is invalid. If a form is valid, you must honor it. The employee, not your organization, is responsible for ensuring he or she meets the exempt requirements. You can remind employees of the importance of submitting an accurate Form W-4. 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.

If the IRS contacts you

In the past, employers were required to submit to the IRS all Forms W-4 that claimed complete exemption from federal withholding or claimed more than 10 allowances. Employers are no longer required to do so, however.

In certain circumstances, the IRS may direct you to submit copies of Forms W-4 for certain employees in order to ensure that the employees have adequate withholding. You are required to submit the Forms W-4 to the IRS only if directed to do so in a written notice, or if the IRS releases new guidance requiring you and other employers to do so.

If you receive a notice from the IRS, you might need to make original Forms W-4 available for inspection by an IRS employee. Remember, the IRS requires you to keep records of employment taxes (including Forms W-4) for at least four years. If you receive a notice, send the requested copy or copies of Form W-4 (and any other requested documents) to the IRS at the address provided and in the manner directed by the notice.

Expiration date

A Form W-4 claiming exemption from withholding is valid for only one calendar year. To continue to be exempt from withholding in the next year, an employee must give you a new Form W-4 claiming exempt status by February 15 of that year.

If the employee does not give you a new Form W-4, withhold tax as if he or she is single, with no withholding allowances. However, if you have an earlier Form W-4 (not claiming exempt status) for this employee that is valid, withhold as you did before.

If the employee provides you a new Form W-4 claiming exemption from withholding after February 15, you may apply the exemption to future wages, but do not refund taxes withheld while the exempt status was not in place.