Employees sometimes claim exemption from withholding on their Forms W-4. What are the applicable rules?

An employer is not required to deduct and withhold income tax upon payment of wages to an employee if the employee has filed a valid certificate of exemption from withholding. An employee may claim exemption from income tax withholding if he or she (1) had no income tax liability last year and (2) expects to have no tax liability this year. Code section 3402(n).

See the Form W-4 instructions for more information. An employee must submit a Form W-4 to the employer each year by February 15th to claim exemption from withholding. If the employee does not provide a new Form W-4, the employer must withhold tax as if the employee were single with zero withholding allowances.

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