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Is a US citizen allowed to have no federal income tax withheld on their paycheck?

Assume that the person has a moderate-income, full-time job, but their child tax credits equaled more than their taxes due in 2020. In other words, if this person had zero federal tax withheld in all of 2021, they would expect a small tax refund at the end of year. They figure it would be silly to have money withheld that belongs to them.

Relatedly, should this person indicate "exempt" on their W4, or is there another more appropriate way to achieve this.

3 Answers 3

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You should not mark "exempt" if you're not exempt. The requirement for exemption is listed in the current instructions:

You may claim exemption from withholding for 2022 if you meet both of the following conditions: you had no federal income tax liability in 2021 and you expect to have no federal income tax liability in 2022.

If you do mark "exempt", you'll have to provide a new W4 for 2023 (and every year as long as you claim "exempt").

You can reduce your withholdings using deductions count. The higher deduction the less the withholding, and depending on your salary you may end up with 0 withholding if the deduction is high enough to justify that.

You can use the IRS withholding estimator to calculate how to fill your W4.

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  • Ugh! The withholding calculator is down for maintenance for the whole month, apparently...
    – nuggethead
    Jan 23 at 20:16
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    @nuggethead there are tons of those all over the internet
    – littleadv
    Jan 24 at 1:01
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    Last time I filled a W4, the directions for "exempt" were: "Check this box if you paid zero federal taxes <last year> and expect to pay zero federal taxes <this year>".
    – Joshua
    Jan 26 at 3:56
  • @DavidSchwartz it appears that you're right, according to the current (2022) instructions they do.
    – littleadv
    Jan 26 at 17:20
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Yes, it is possible to have $0 in federal income tax withheld from your paycheck.

The W-4 form was revamped in 2020 to be more accurate, straightforward and easier to use. Under the old form, you really had only one tool to reduce your withholding: You could increase your claimed number of exemptions, which didn’t have to match reality, but it was very unclear how that number actually affected your withholding.

With the current Form W-4, they have attempted to match what you actually see on your 1040 tax return. If you haven’t filled out a new W-4 since it was redesigned, then your withholding is probably not optimal.

You can use the IRS Withholding Calculator, once it is back up-and-running again, to help you fill out the new form, or you can just pull out last year’s tax return and fill out the W-4 using those numbers:

  • Enter in the number of children in Step 3
  • If you have any above-the-line deductions or itemized deductions that reduce your tax further, fill out the “Deductions Worksheet” on page 3 and put the result in Step 4b.

That’s it. If you do that using the numbers from your 2020 tax return where you had no tax liability, you probably will have very little or no tax withheld on your next check. If you still have too much withheld, you can increase the deductions claimed on your W-4 Step 4b and submit again.

However, I will caution you here: 2020 had some special, one-time tax credits (stimulus payments) that affected most people’s tax due. So just because you didn’t pay any tax in 2020 doesn’t necessarily mean that you won’t owe any tax in 2021 or 2022. My advice is to fill out the W-4 Steps 3 and 4 as accurately as possible, and just accept the withholding that results. All the tax credits are supposed to be taken into account by that form automatically.

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  • Excellent point, especially considering that the child tax credit went down 50% this year!
    – nuggethead
    Jan 24 at 13:28
  • It seems like it would be possible to max out your deductions to avoid any withholding from your paycheck, invest your surplus income in a high yield savings (or other investment), then pay the tax debt using the principal and pocket the proceeds of almost a year of extra interest or gains. I wonder if that's illegal (unwise is another question altogether).
    – Rich Moss
    Jan 24 at 23:34
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    @RichMoss There is a penalty that is assessed if you owe too much at tax time. Jan 24 at 23:52
  • "affected everyone's tax due" would be more accurate as "affected most people's tax due"
    – shoover
    Jan 25 at 2:25
  • @shoover That’s fair. Fixed. Thanks! Jan 25 at 2:27
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Yes, it is perfectly legal to have no withholdings. Marking exempt is a little different.

You can mark "Exempt" on your HR form at your job and they will not withhold anything. Should you - probably not. The IRS will still know you owe taxes.

The government makes it very easy and straightforward to pay your taxes. Most Americans couldn't cover a $1000 emergency. Your taxes are likely more than that.

If you want to reduce withholdings, do so via things like the child tax credit, or other deductions. Marking exempt means that you do not pay taxes in America, don't do this if it's not true. It'll certainly draw attention, and will likely get you flagged for more scrutiny.

As long as you pay they probably won't care, but the IRS arguably has more power than the FBI. Which they use to pursue tax evaders. Don't get in their cross-hairs.

EDIT

While you shouldn't lie on an IRS form, it's very unlikely they'd do much as long as you pay on time. The government setup the IRS withholding system because most people are bad with money and couldn't pay a lump sum in taxes.

They'll probably send you a nasty-gram if you check exempt when you are not. They'll probably also contact your employer and simply make them withhold the appropriate amount. The IRS can go to your employer or bank and simply take what they are owed. They are always first in line.

That last sentence is why everyone here is telling you not to do this. The IRS cares about getting paid most of all. They probably won't bother going to court because they don't have to. They'll just come and take whatever they think is fair and tell you to be more careful next time.

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  • If you falsely marked "exempt" and end up owing taxes, the IRS is not going to be happy and will possibly treat this as tax fraud (or at least an attempt at such) rather than merely failing to have enough withheld. Jan 25 at 22:13
  • @R..GitHubSTOPHELPINGICE: unlikely; theoretically there is a $500 penalty for misstating W4 to cause underwithholding, but they'd have to get DoJ to spend like $5-10k to prosecute which they won't. If you underwithhold over $1k (and 10%, which will always be so if you do zero), they will collect the section-6654 form-2210 'penalty' (really interest, see NTA 2021 purple book) for a small profit, and probably send a 'soft letter' telling you to mend your ways. If you persist, they can direct the employer to ignore your W4 and withhold anyway (a 'lock-in' letter). Jan 26 at 5:02
  • @dave_thompson_085: I was under the impression that falsely claiming a blanket "exempt" was taken more seriously than just misstating the numbers, on the basis that it's a sort of "sovereign citizen" posture. Jan 26 at 15:36
  • @R..GitHubSTOPHELPINGICE: years ago employers did send in to IRS W4's claiming exemption and they might use it as one indicator to look at you, but I never heard of this by itself being pursued, and now they don't get this info. What used to be called tax protesters and are now called frivolous filers aim to avoid any payment, not just withholding, and from IRS' point of view if you (file correctly and) full pay timely without enforcement action, it doesn't matter whether you did so via withholding. Jan 26 at 21:33

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