What is exemption from withholding?

An exemption from withholding is when someone has no tax income liability and is exempt from having income taxes withheld from her paycheck. The exemption is only for income taxes, so Social Security and Medicare taxes are still withheld.

A person can claim an exemption from withholding if she had no income tax liability the previous tax year and she reasonably expects to have no income tax liability in the current tax year. If a person claims an exemption from withholding when she is not eligible, she must pay all of her income taxes when she files her return, and she may have to pay a penalty.