W-2 Exempt: Eligibility and Filing

W-2 employees are workers who are paid through the direct deposit of wages. The W-2 form is used to report and pay taxes on wages, including federal, state, and local income taxes, and Social Security and Medicare. W-2 employees are required to file their taxes every year. However, there can be instances when they can file for a W-2 exempt.  

But you may be asking about how to know if you’re eligible for a W-2 exemption and how to file it? This article will walk you through this tedious process so that you will be guided through the necessary steps to file your taxes correctly. 

business owner applying for W2 exemption

What Is W2 Exempt?  

W-2 is the form that each employee fills out to report and pay taxes on wages. W-2 also states the employee’s pay, which is usually directly deposited into the employee’s bank account every pay period. Your employer also sends a copy of your W-2 to the IRS.  

By definition, an employee is an individual who is employed by another individual as an occupation or service and is usually paid for their services with wages, which include salaries, commissions, or other compensation based on a salary or hourly wage and other benefits.  

Thus, since W-2 is for employees, it does not include self-employed workers or independent contractors. They have to file a different form. However, in some instances, some employees could be exempted from taxes. It is when they can file for a W-2 exemption.  

How to Know if You’re Eligible for Tax Exemption?  

You are eligible for W-2 exemption if you meet the following requirements: you owed no federal income tax in the previous year, and you don’t owe federal income tax in the current year. It happens when your tax is smaller than your refundable credits. And when this remains true in the current tax year, you can file for tax exemption.  

What if You’re Not Eligible, but You Filed for Exemption?  

If you filed for tax exemption and were later found out that you are not eligible for it, you may face a large tax bill and possible penalties after filing your tax return. It usually happens if you declare withholding allowances that reduce the amount of deductible tax from your paycheck. If you don’t have justifiable reasons why you made such a statement, you can expect to pay possible charges as a form of penalty.  

Is it Illegal to File as Exempt?  

The answer is no. However, there are specific criteria you must meet to file an exempt status. Additionally, it’s important to note that even though you have successfully been exempted from taxes, you should still expect your employer to withhold Social Security and Medicare taxes.  

business partners discussing application for W2 exempt

Do You Need Help With Filing for W-2 Exempt?  

If you are struggling to understand this process, then it’s best to get the help of a bookkeeping professional or a tax adviser who can assist you. At ClearPath, we offer employer of record services to help companies with their payroll and tax requirements. We can also assist with the filing of the W-2 exemption.  

With years of experience and trusted software, we assure you that your tax forms are filed in the right way. Our services benefit employers and employees alike so that they won’t have to deal with the stresses of the tax season and, most especially, the hassle and financial burdens of erroneous tax filing. Please give us a call today to book a consultation