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My son is a full-time student. We still claim him as a dependent. In 2015 he earned ~$2000 as a self-employed contractor, so no tax was withheld but he owed some self-employment tax.

In 2016 he will be working as an employee and expects to earn about $5200.

Can he claim exempt status on his W-4? The requirements are:

  • Last year I had a right to a refund of all federal income tax withheld because I had no tax liability, and

  • This year I expect a refund of all federal income tax withheld because I expect to have no tax liability. If you meet both conditions, write “Exempt” here .

Last year, he technically didn't have any federal income tax withheld. And his income was well under the limit for needing to file a return if it had been employee income. And this year he will be under the limit for an unmarried person who is someone else's dependent to need to file.

So I suspect that he can and should fill in Exempt there, but since he did owe federal tax last year, due to the self-employment tax I'm not 100% sure.

  • looks like it will be safer to just use the calculator and put in an appropriately large number of allowances. – PurpleVermont Jun 10 '16 at 23:04
  • I agree you've found a good question: does 'tax liability' include SE (and the other additional taxes on lines 58-62) or only actual income tax? Pub 505, helpful in other cases, is no better here than the bare W4, and I'm not going to look for code or regs. OTOH, zero bracket for single in 2016 is up to $9275, so he can stay on the safe side by 'allowing' withholding and there won't actually be any. – dave_thompson_085 Jun 12 '16 at 15:12
  • @dave_thompson_085 Since he's a dependent, I think his zero tax bracket is lower, but he's still well within it. But if he allows withholding and just puts down 1 allowance (per the instructions on W-4) they will withhold because his weekly income "looks like" it will get him well over that minimum if he worked all year. The fact that he is only working for the summer warps that. He used the online calculator and came up with 9 "allowances" -- he started work today and I think that's what he planned to put down. – PurpleVermont Jun 13 '16 at 18:26
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It sounds like your son had a nonzero amount in line 57, form 1040, so he has a nonzero amount in line 63, form 1040, "total tax". The IRS says

Your total tax was zero if the amount identified in one of the following three situations was zero:

...

Your total tax on Form 1040, U.S. Individual Income Tax Return, was the amount listed on the line labeled "total tax" taking in consideration certain reductions. See the section No Tax Liability Last Year in Chapter 4 of Publication 505, Tax Withholding and Estimated Tax, for these reductions

...

Sorry.

  • That looks like the rule for determining whether a penalty is due, not for whether you can claim exempt on the W-4? – PurpleVermont Jun 10 '16 at 22:36

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