Often a Maine-based small business will be asked by staff members if they can be exempt from federal withholding. There are a few different things to keep in mind when considering this question:

If the staff member had no liability the previous year, i.e., they received a refund of all federal income tax paid, they can claim to be exempt. To determine if the employee will have a tax liability this year, the W-4 worksheet asks:

1. Can the employee be claimed on someone else’s income tax return this year, such as a parent or guardian?
2. What amount of income does the staff member expect to earn this year?
3. Will the employee expect to receive more than $250 in unearned income, such as interest or dividends, this year?

Remember that an “exempt” W-4 is only valid for one year. Small business owners need to check with employees who claim to be exempt every January to fill out new W-4s to reflect changes in their situations.

It used to be that employers were required to send copies of questionable W-4s to the IRS for evaluation. This requirement has been dropped, but the IRS may still determine that an employee is under-withholding based on information reported on W-2s. If an employee is found to have a serious under-withholding problem, the small business owner may be contacted and instructed to withhold at a more appropriate rate. (IR 2005-45)  

Contact Filler & Associates for help with the compliance of payroll laws and regulations.