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W-4 Form filled out by Employee

Hello payroll gurus! Hope you all can help me with this clarification.

As an Employer:

If an employee fills out a W-4 form claiming Exempt on #7 do we need to question it and research if they are qualify to claim it?

We have employees who claim "Exempt" on their W-4 forms for 4 paychecks and then come back and change it back to normal. We don't question them on anything and I'm wondering if this is the correct thing to do. However we do get the IRS Block Letter and we definitely follow the instructions that is listed.

I just want to be sure we are doing the right thing.

What is your process?

I appreciate any post on this.

Thank you


  • No, you don't. Payroll is not expected to be the W-4 police.

    Neither the IRS nor the EDD require that forms claiming 10 or more exemptions, or claiming exempt, be sent in. The employer can, however, voluntarily submit copies of forms they believe "questionable".
  • And, the only way you can research this (other than by sending it to IRS) is to question the employee about their personal tax situation, which I personally want to stay as far away from as possible. It's none of my business - at least until that IRS levy shows up. :roll:
  • It's none of my business - at least until that IRS levy shows up.
    Or the lock in letter? But even then, except for compliance with the IRS instructions, it is none of your business. It is very possible that a relatively high income taxpayer could qualify - the requirements are that the taxpayer have had a right to a refund of all federal income tax withheld for 2009 because the taxpayer had no tax liability and that the taxpayer expects a refund of all federal income tax withheld for 2010 because the taxpayer expects to have no tax liability.

    I'm thinking of the couple on the cover of Money magazine a number of years ago pictured under the caption "This couple had $400,000 of income and paid no income tax - and you can too!" Turns out they had a very large net operating loss carry forward.

    I'm also thinking of the student who had no tax liability for 2010 and will be getting a first time home buyer credit for 2010. That could have resulted in a change in the W-4 from Single/1 to "exempt" just about the time the house was purchased. Certainly possible at a starting salary of less than something close to $50,000.

    And neither the employer nor anyone in payroll needs to know anything about any of that in either situation.
  • Thank you so much everyone! You have given such great response.

    Thank you....thank you....thank you...

    You all have a wonderful day!
  • Just a comment - from the employee's standpoint, if the employee is claiming exempt simply to avoid withholding on certain checks, and does not really believe that he or she will not have a tax liability for the year or, had a tax liability the previous year, and is not eligible to claim exempt, the employee should not be signing a Form W-4 "Under penalties of perjury...". Certainly not if there was a tax liability for the previous year as that is easy to prove that the employee knowingly signed a false document.

    If they want to curb the withholding for a series of checks, that is better done by increasing the allowances claimed - and that could well be a legitimate adjustment to bring withholding into line with what it should be for that part of the year. The risk of jail time is a lot lower.

    But, as I said, that is not for payroll to determine. Although, personally, I might ask if the employee understands the jurat. And the employee might just then tell me that the form is invalid. :shock: And we know what to do with invalid W-4 forms. :mrgreen: (there seems to be a lot of controversy over what "Mr. Green" means when used in a post - feel free to interpret as you will, but you will likely be incorrect) :wink:
  • When I receive an Exempt W4, I have a quick discussion with the employee to make sure they understand what they are requesting.

    I read the employee Line 7 on the Federal W4 which describes the qualifications for exemption, then I remind them that on the signature line it says "Under penalties of perjury, I declare that I have examined this certificate and to the best of my knowledge and belief, it is true, correct, and complete."

    If they say yes, I accept it. If they say no, I ask for a new W4.

    Also, regarding your folks who are playing the W4 game by going exempt vs. non-exempt. As an employer you have to put the new W4 in effect no later than the beginning of the first payroll period ending on or after the 30th day after the form is provided by the employee to the employer.

    I'm not a game player in these matters, but if you have a high volume causing issues, then the 30 day way may be an option for you.
  • The other way to nearly eliminate this is to put into place the 30-day effective rule that is discussed in IRS Publication 15. Just make sure you do it for ALL employees, not just those who are trying to "fool with the system".
  • Well said PrJeff - and I think that is the right approach.

    It rarely does any good for company morale to have an IRS swat team rush into the work place and haul off an employee for perjury. While payroll should not be giving tax advice, helping employees understand what they are signing seems to me to be appropriate.

    Just make sure you do it for ALL employees, not just those who are trying to "fool with the system".
    pattypa - I understand the reasoning, but you may want to leave some wiggle room in the policy for hardship cases.
  • Just make sure you do it for ALL employees, not just those who are trying to "fool with the system".
    pattypa - I understand the reasoning, but you may want to leave some wiggle room in the policy for hardship cases.

    Me????? Wiggle???????? :o :lol:
  • Me????? Wiggle????????
    Well, as Snoopy commented in Peanuts - "If you can't dance, you should at least be able to do a happy hop."
  • When employee do fill out the W-4 form claiming exempt we do have them read the top portion under "Exemption from withholding" and the notation listed under #7. But if they insist on claiming "Exempt" then it's on them. We definitely don't give tax advise we refer them back to their tax service person. However, I don't know if this is a good thing....but I do inform them if you normally owe at the end of the year then I don't think "Exempt" is good option to claim. But again we don't know people situation......

    I also pulled the publication 505 information it has good information regarding the W-4 form. Just never knew this info until I contacted the IRS.

    Again, thank you everyone for your great response. It's always helpful to see what is out there.
  • As most have replied, in Payroll, we are not the W-4 police but in order to avoid those discussions that begin with "Payroll didn't withhold enough taxes...." here's what I do when I get a W-4 marked "exempt".

    I make a copy to return to the employee and send a blank W-4 for their convenience. Along with this I have a memo to send to the employee that tells them that "claiming exemption is only allowed if the following...", and then have I inserted the verbiage from line 7 of the W-4 verbatim (which they should have already read, but anyways). I also send the employee the pages from IRS publication 505: Tax Withholding and Estimated Tax that refer to Exemption from Withholding (pg 11 & 12 for 2010). Figure 1-B on page 11 of the 2010 Publication 505 is very helpful.

    In the two years that I have been doing this, I have received a new W-4 every single time after the employee has had a chance to review what claiming "exempt" really means. If there was a case where the employee didn't respond, then I would just enter the "exempt" W-4 within the 30-day effective rule.
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