Payroll in Practice: 7.25.2022

Question: The Washington, D.C., withholding certificate Form D-4 refers to the federal Form W-4 exemption as a qualification for claiming the exception in the District of Columbia. What are the implications if an employee writes “exempt” on the D-4 and does not qualify for the federal exemption? Does a nonresident certificate Form D-4A overrule the D-4?

Answer: The District of Columbia has two exemptions regarding withholding tax from wages: one for residents, the other for nonresidents.

The district income tax applies only to residents of the District of Columbia. On that basis, nonresidents are not subject to district income tax and, by extension, are not subject to district income tax withholding.

Nonresidents working in the district must file Form D-4A, Certificate of Nonresidence, to establish that they are not subject to district income tax withholding. To qualify, workers must have a permanent residence outside of the district for the entire tax year and cannot reside in the district for at least 183 days during the tax year. Military spouses may qualify as nonresidents under the Military Spouses Residency Relief Act.

Form D-4, Employee Withholding Allowance Certificate, has a check box to claim exemption from district income tax, which may be a backup or notice to the employer in case nonresidents are not aware of the withholding exemption or Form D-4A. The district also has Form D-40B, Nonresident Request for Refund, which allows workers to claim a refund of withheld tax instead of filing a district income tax return.

The reference to the exemption on federal Form W-4, Employee’s Withholding Certificate, is part of the requirement for a district resident to qualify for exemption from district withholding. Like the federal W-4 exemption, this is an exemption from withholding and not from tax liability. The district withholding exemption requirements are like the federal W-4 rules but contain an additional requirement that the employee also qualify for the federal W-4 exemption.

A district resident may claim exemption from withholding of district tax if the employee did not owe any district income tax for the immediately preceding calendar year, had a right to a full refund of all district income tax withheld for that year, does not expect to owe any district income tax for the current year, expects a full refund of all district income tax withheld, and qualifies for exempt status on federal Form W-4.

To reiterate, a district nonresident is exempt from district income taxes. A district resident who claims exemption from withholding is subject to tax if taxable income reaches a certain amount. If a district resident’s situation changes and the requirements for exemption would not be met during the year, a new Form D-4 that does not claim an exemption is required to replace the Form D-4 claiming exemption. A district resident would not be able to claim the exemption, even though otherwise qualified, if failing to qualify for the federal W-4 withholding exemption.

Some states have similar requirements for withholding exemptions. For example, Illinois requires that an employee be able to claim exemption from federal income tax withholding to claim exemption from state withholding. Illinois nonresidents who are residents of a state that has a reciprocal agreement may file Form IL-W-5-NR, Employee’s Statement of Nonresidence in Illinois, to claim exemption from withholding under the reciprocal agreement. Whether the Illinois employee can claim exemption from federal withholding has nothing to do with the exemption from tax on wages earned in Illinois under the reciprocal agreement.

A district nonresident does not have to be exempt from federal income tax withholding to claim exemption from district income taxes because a nonresident is exempt from district tax. The reference to federal exempt status on the D-4 only applies to residents of the district who are claiming exemption from district withholding.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., or its owners.

Author Information

Patrick Haggerty is the owner of a tax practice in Chapel Hill, N.C., and an enrolled agent licensed to practice before the Internal Revenue Service. The author may be contacted at phaggerty@prodigy.net.

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