If your employee certified s/he met the following two conditions on line 7 of their Form W-4, then select “Yes” under “Exempt from Withholding.”
- Last year, the employee had a right to a refund of all federal income tax because the employee had no tax liability, and
- This year, the employee has a right to a refund of all federal income tax because the employee expects to incur no tax liability.
If an employee is exempt from federal income tax, box 1 of their Form W-2 will still report all wages, tips, other compensation, and box 2 will report zero (“0”) for federal income tax withheld.
You are not required to withhold federal income tax from wages you pay a Household employee. You should withhold federal income tax only if your employee asks you to withhold it and you agree. The employee must give you a completed Form W-4, “Employee’s Withholding Allowance Certificate.”