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When helping staff members fill out W-4 forms, they may ask if they can be exempt from federal withholding. Here are some points to keep in mind: 

 Did the employee have a tax liability in the previous year? If he or she received a refund of all federal income tax paid (or had a right to a refund), the employee had no liability and can claim to be exempt.

 Does the employee expect to have a tax liability this year or expect to qualify for a refund of all
federal income tax paid? To make this determination, the W-4 worksheet asks:

 Can the employee be claimed on someone else's income tax return this year (such as a parent)?

 What level of income does the employee expect this year?

 In addition to earned income, does the employee expect to receive more than $250 in unearned income (such as interest or dividends) this year?

Note: An "exempt" W-4 is only valid for one year. If your payroll includes employees who claim to be exempt, require them to see you every January to fill out new W-4s to reflect changes in their situations.

New ruling: Until recently, employers were required to send copies of questionable W-4s to the IRS for evaluation.  As of April 14, 2005, this requirement has been dropped. The IRS may still determine that an employee is under-withholding based on information reported on W-2s.  If your employee is found to have a serious under-withholding problem, your payroll department may be contacted and instructed to withhold at a more appropriate rate. (IR 2005-45)  

 If you have payroll-related questions, please contact Crystal Martin at 717-757-6999 or 800-745-8233, or send her an email by using the form below. 
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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.

IRS Circular 230 Notice: To ensure compliance with requirements imposed by the IRS, we inform you that any US tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code.

Securities and advisory services offered through Geneos Wealth Management, Inc. Member FINRA/SIPC. Geneos Wealth Management, Inc is not affiliated with Stambaugh Ness.