When can an employee claim exemption from withholding?

An employee can claim exemption from withholding only if they had no federal tax liability for the previous year and expect to have none for the current year. This means that if an individual’s earnings were low enough that they did not owe any federal income tax in the previous year, and they anticipate a similar situation for the current year, they may qualify to claim exemption on their W-4 form.

This requirement is in place to ensure that only those who genuinely will not owe taxes benefit from withholding exemption, while those who had a tax liability in the previous year or expect one for the current year must continue to have taxes withheld from their paychecks. By confirming that they had no liability last year, the IRS helps maintain a system where taxpayers contribute appropriately based on their earnings and tax obligations.