Question: An employee who claimed “exempt” on Form W-4 for 2022 must have provided a new W-4 for 2023 by Feb. 15, 2023, for the exemption to continue. Is this also true for Form W-4P, Withholding Certificate for Periodic Pension or Annuity Payments?
Answer: An employee may claim exemption from federal income tax withholding, but not exemption from the tax itself, by writing “EXEMPT” in the space below Step 4(c) on Form W-4, Employee’s Withholding Certificate.
This exemption is an annual claim based on the employee having no federal income tax liability in the previous tax year and the expectation that the employee will have no federal tax liability in the current tax year.
Employees who claim this exemption should understand that the term “tax liability” does not refer to a balance due on the tax return when it is filed. An employee had no federal income tax liability for 2022 if the total tax on Line 24 of the 2022 Form 1040, US Individual Income Tax Return, or 1040-SR, US Tax Return for Seniors, is zero or is less than the sum of Lines 27, 28, and 29. Line 27 is used to report the earned income credit, Line 28 is for the additional child tax credit, and Line 29 is for the American Opportunity Tax Credit.
There is also no federal income tax liability if a return was not required because the employee’s income was below the filing threshold for the employee’s correct filing status.
The claim for Form W-4 exemption from withholding is necessarily an annual claim because the employee’s underlying tax situation may change from year to year.
Form W-4P and its instructions from 2022 or later do not permit a payee to claim an exemption from withholding. In most cases, however, a payee may elect to have no tax withheld from the payments by writing “NO WITHHOLDING” in the space below Form W-4-P Step 4(c). On Forms W-4P from 2021 or earlier, the payee could elect to have no tax withheld by checking a box on Line 1.
However, a taxpayer who is a US citizen or a resident alien may not elect to have no federal income tax withheld on payments that are to be delivered outside the United States and its territories.
Because the Form W-4P election to forego federal income tax withholding is not conditioned on the employee’s federal tax situation, the election does not expire each year and there is no need to submit a new form each year.
The 2023 Pub 15-T, Federal Income Tax Withholding Tables, states:
“A payee who writes “No Withholding” on a 2022 or later Form W-4P in the space below Step 4(c) shall have no federal income tax withheld from their periodic pension or annuity payments. In the case of a payer that used the 2021 Form W-4P for 2022, a payee who checked the box on line 1 on the 2021 Form W-4P shall have no federal income tax withheld from their periodic pension or annuity payments.”
The IRS cautions in the Form W-4P instructions that, if not enough tax is withheld, the payee might owe tax when the tax return is filed and might owe a penalty unless the payee made timely estimated tax payments. If too much tax is withheld, the payee will generally be due a refund when the tax return is filed. If the payee’s tax situation changes, or the payee later chooses to have federal income tax withheld, the payee should submit a new Form W-4P.
This column does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Patrick Haggerty is the owner of a tax practice in Chapel Hill, North Carolina, and an enrolled agent licensed to practice before the Internal Revenue Service. The author may be contacted at firstname.lastname@example.org.
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