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.